With the FTSE 100 at record highs and the S&P 500 up 8% since the start of the year, some investors are getting nervous about the level of the stock market. Michael Burry is one of them.
According to Burry, rising interest rates are likely to bring a recession in the US. In response, the Federal Reserve will lower rates, leading to the thing they’ve been trying to tackle – inflation.
I don’t know whether this is right or wrong. But I’m preparing for the possibility of a stock market crash by identifying the stocks I’d like to buy if prices fall sharply.
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Coca-Cola
I’ve been trying to convince myself that Coca-Cola shares are a good investment at today’s prices. But at a price-to-earnings (P/E) ratio of 26, I just can’t do it.
Coca-Cola looks like the kind of company that lets it’s shareholders sleep well at night. It has a strong brand and generates solid, steady cash flows.
The current share price seems to be pricing in significant growth. But with modest revenue growth, steady operating margins, and an increasing share count, I find this optimistic.
As a result, I don’t think that Coca-Cola shares are a worthwhile investment right now. Offer it to me after a stock market crash, though, and I’ll be on it like a shot.
Experian
Experian is another stock that I’d buy if the market fell significantly. I do own this stock in my portfolio and I’d love to add to my investment.
When I bought my shares, the price was about 22% lower than it is today. And that makes quite a difference.
In my view, Experian is still a great business. It has little competition, provides a valuable product, and barriers to entry for new competitors are high.
These are great qualities, but they don’t make the stock a buy at any price. Right now, I see it as one to watch, rather than one to buy.
Diageo
Despite a turbulent 12 months in the stock market, shares in Diageo have been proving pretty resilient. That’s great for shareholders, but less good for investors looking for opportunities.
Diageo’s share price gives the entire company a market value of just under £81bn. With £17.5bn in debt and £3bn in cash, the business has an enterprise value of around £95bn.
Against that, £2bn in free cash amounts to a 2% annual return. Even with the business growing at 5% per year, that’s still not attractive to me.
With inflation in the UK currently at 10%, I’d be concerned about buying the stock at today’s prices. A lower price tag would, but a big drop in the share price would put Diageo firmly on my list to buy.
Visa & MasterCard
Lastly, I think that both Visa and Mastercard are brilliant businesses. Together, they dominate their industry where barriers to entry for competitors are high.
Furthermore, those competitive positions don’t take much cash to maintain. Neither company has high capital expenditures, resulting in impressive cash generation.
Visa’s capital expenditures account for around 5% of the cash it generates through its operations. For MasterCard, that number is 10%.
None of this is a great secret, though, which is why the shares are expensive today. But in a stock market crash, I’d be looking at buying both.
