Stock market crash may be around the corner: 3 stocks to buy kick in when it happens

Fasten your seat belt, investors: a stock market crash could be brewing.

In the past 14 months since the benchmark S&P 500 (SNPINDEX: ^ GSPC) hit its lowest bear market, stocks experienced a historic tear. While the S&P 500 has averaged an annual total return (including dividends) of 11% since 1980, it has gained as much as 88% since the low of March 23, 2020. History tells us that this has not happened. is not sustainable.

History suggests the stock market is struggling

History is the enemy of the stock market in many ways. For example, each of the previous eight bear markets, dating back to 1960 and not including the coronavirus crash, exhibited at least a double-digit percentage decline in the S&P 500 within three years of finding a low. In total, there have been 13 corrections in the three years following the last eight bear markets (i.e. one or two after each). This tells us that it is quite common for the rebound from a bear market bottom to be bumpy.

Perhaps a little more damning is the historical assessment of the S&P 500 price / earnings ratio. According to the S&P 500 Shiller P / E ratio (which measures inflation-adjusted earnings over the past 10 years), the average P / E for the benchmark index has been around 16.8 since 1870. As of May 18, it was close to 37. In the previous four instances in the past 150 years that the S&P 500’s Shiller P / E has crossed and maintained 30, a minimum drop of 20% soon followed for the index. .

Also, don’t overlook how often corrections occur. There have been 38 double-digit declines in the S&P 500 since the early 1950s. This is a crash or correction every 1.87 years, on average, or roughly every 22.5 months. .

Big downside moves create opportunities for long-term investors

But even if history is currently the enemy of major indices, it is an important ally for investors. This is because every major crash and fix has turned out to be a buying opportunity. When the next crash occurs, you should be looking to buy the next three stocks hand in hand.

Amazon

It has become very clear over the past decade that Amazon (NASDAQ: AMZN) should be a staple in virtually all investor portfolios. It is a foundational company with exceptional long-term growth prospects, insane market dominance, and incredible cash flow growth.

Almost everyone is probably familiar with Amazon for its leading online marketplace. Amazon is expected to see its share of U.S. e-commerce grow from 60 basis points in 2021 to 40.4 percent, according to a new report released by eMarketer. In other words, Amazon controls about $ 0.40 of every dollar spent online in the United States, and that’s more than 33 percentage points ahead of its next closest competitor, Walmart.

On the one hand, retailer margins are generally quite low. On the other hand, it was able to take advantage of its incredible market share to sign up over 200 million people for a Prime membership. The fees Amazon collects from Prime help it lower the prices of its competitors. Meanwhile, Prime members tend to spend a lot more than non-Prime buyers, and they have an added incentive to stick with Amazon’s high-margin products and services.

If that wasn’t enough, Amazon is also a leading provider of cloud infrastructure services. Amazon Web Services (AWS) increased sales by 30% in 2020, during the worst economic recession in decades. Better yet, cloud infrastructure margins revolve around retail margins. This means that as AWS represents a larger percentage of total sales, Amazon’s operating cash flow will grow at a much faster rate than revenue. Over the next four years, Wall Street expects the company’s operating cash flow to more than double.

Innovative industrial properties

Marijuana stock is another great business to buy in the next crash Innovative industrial properties (NYSE: IIPR).

It’s no secret that the United States is the zero point for a cannabis explosion. According to New Frontier Data, marijuana sales growth is expected to average 21% per year between 2019 and 2025. That means we could see more than $ 41 billion in annual cannabis sales nationwide by the middle. of the decade. While all eyes are on the direct players, ancillary pot stocks can flourish as well. This is where Innovative Industrial Properties come in.

IIP, as the company is also known, is a cannabis-focused real estate investment trust (REIT). It’s a fancy way of saying that she buys growing and processing facilities that she rents for long periods of time. It aims to make banking from the rental income it receives. However, it also incorporates a modest component of organic growth: the company passes rent increases on to its tenants each year.

As of last week, Innovative Industrial owned 71 properties covering 6.5 million square feet of rental space in 18 states. All 6.5 million square feet are currently leased, with a weighted average lease term of 16.8 years. IIP will likely have a full return on its $ 1.6 billion invested capital in less than half that time.

In addition, Innovative Industrial Properties’ sale and leaseback agreements are a hit with multi-state operators (MSOs). As long as marijuana remains illicit at the federal level, access to basic banking services for MSOs can be uncertain. IIP steps in and acquires properties for cash, boosting MSO’s balance sheets. In return, IIP immediately rents the property to the seller, thereby eliminating a long-term tenant. With few surprises, IIP remains a hearty growth stock to buy in the event of a stock market crash.

Vertex Pharmaceutical

A third outstanding company to gobble up in the next wave of panic selling is biotech stocks Vertex Pharmaceutical (NASDAQ: VRTX).

Most biotech stocks are loss-making companies crossing their proverbial fingers and hoping to create a blockbuster drug. Vertex is not like most biotech stocks. It has been profitable for some time and has managed to develop several generations of the best-selling drugs.

Where Vertex shines is in the treatment of cystic fibrosis (CF), a genetic disease characterized by the production of thick mucus that can clog the pancreas and lungs. It currently has no cure and is known to cause premature death. The multiple generations of treatments developed by Vertex have helped improve lung function for certain mutations in the disease.

Vertex was last approved in 2019 when the combination drug Trikafta got the green light. Trikafta targets the most common mutation in cystic fibrosis, which means that approximately 90% of patients with cystic fibrosis can take it. Trikafta was finally approved by the Food and Drug Administration five months ahead of its scheduled review date, and it grossed nearly $ 3.9 billion in its first full year of sales.

Equally exciting is Vertex’s growing cash flow. At the end of March, it had at least $ 6.9 billion in cash and cash equivalents. This capital is essential to develop the ten or so internal components of the company and can be used to make acquisitions in order to diversify its product portfolio.

Simply put, you don’t come across a business that is growing steadily at a double-digit rate with a forward PER ratio of just 18. Vertex is already a real bargain, and it would be the perfect stock to buy on n ‘any major market. weakness.