History would suggest that a crash or correction is coming — and that’s great news if you have cash ready to invest.
Aug. 12, 2020
This has been a year that investors will be talking about for decades to come. The coronavirus disease 2019 (COVID-19) pandemic has, in a matter of months, upended societal norms, sent the U.S. unemployment rate to levels not seen since the 1930s, and registered the highest volatility readings we’ve ever seen for equities.
During the first quarter, the benchmark S&P 500 (NYSEARCA: VOO) lost over than a third of its value in less than five weeks. This was followed by one of the strongest bounce-back rallies in decades. But the thing is, bear market bounces have a history of hitting speed bumps. Though it’s impossible to predict when a stock market crash or correction will occur, historical data would suggest that one is coming relatively soon.
However, a stock market crash doesn’t have to be a bad thing for investors. If you have a long enough time horizon, corrections of all sizes are merely an opportunity to buy into great companies at a discount. Should a stock market crash indeed be in the offing, I’ll be looking to buy, or add to, the following three stocks.
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One company that I already own, but would prefer to own a lot more of, is social media giant Pinterest (NYSE:PINS). Though I was lucky enough to buy into Pinterest on multiple occasions during the coronavirus collapse in March, I’ve failed to add to my position in the following months. Since its March bottom, shares of Pinterest have delivered gains of more than 250%.
Getting things right in the social media space isn’t as easy as it might sound, but Pinterest is firing on all cylinders. As of June, monthly active user (MAU) count had grown to 416 million, which is 39% more MAUs than it had in the previous year. Pinterest have proved especially popular with international users, which accounted for approximately 106 million of the 116 million MAUs the company has added over the past year.
Here’s the interesting thing about international users: Though the average revenue per user (ARPU) in oversea markets tends to be only 5% of U.S. ARPU, there’s the potential to double overseas ARPU many times over this decade as the platform’s headcount grows.
Pinterest is also coming into its own as an e-commerce player. Since 416 million people are using Pinterest as a platform to share products and ideas that interest them, it only makes sense for Pinterest to connect these users with small businesses that may carry products they’ll want to buy. Pinterest has partnered with Shopify (NYSE: SHOP) to create an e-commerce experience that empowers these small businesses to turn interests into actionable buying.
I truly believe Pinterest has the potential to reach $100 billion in market cap by the end of this decade.
Another stock that’s tripled off of its March lows that I’d love to add to my portfolio during a stock market crash is cybersecurity company Ping Identity (NYSE:PING).
The beauty of all cybersecurity stocks is that they’ve become virtually recession-proof. Although new orders and add-on solutions may slow during periods of economic contraction, the fact is that hackers and robots don’t take time off just because the U.S. or global economy hits the skids. No matter the size of a business, in-house networks and clouds needs to be protected at all times. This provides a level of cash flow security that you simply won’t see in many tech stocks.
As the name suggests, Ping Identity specializes in securing networks and clouds by providing identity verification. This usually takes the form of two-factor authentication, but the company is also prepping for a bevy of future login options that may include passwordless authentication. For the time being, artificial intelligence and machine learning is what makes Ping’s solutions tick. Its identity verification solutions are constantly learning and adapting to identify suspected human and robotic threats.
To build on the cash flow security I mentioned, 93% of Ping’s first-quarter revenue was derived from subscription and support services. The thing about subscription services in the cybersecurity space is there’s often little client churn, and margins are usually robust. In Ping’s case, its Q1 subscription gross margin chimed in at 87%, with annual recurring revenue (ARR) of 21%. That’s six consecutive quarters with at least 21% year-over-year ARR growth, dating back to Q4 2018.
Ping Identity is a company I fully expect to grow by 15% to 20% annually throughout this decade.
Finally, I’ve always used the excuse of the bulls running wild as reason to not buy Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), which is the parent company of online advertising behemoth Google and streaming site YouTube. If a stock market crash strikes, I’ll look to finally pull the trigger.
Like most advertisers (Pinterest included), Alphabet has faced monumental short-term challenges from the coronavirus pandemic. In fact, year-over-year revenue fell 2%, inclusive of currency movements, in the second quarter. This marked Alphabet’s first-ever reported year-on-year revenue decline since going public. But I wouldn’t let this scare investors away from putting their money to work in this dominant ad, streaming, and cloud-service provider.
According to GlobalStats, Google controlled 92.2% of all online search, as of July 2020. For context, Google’s share of worldwide search has stayed consistent between 91.9% and 93% over the trailing year. The ad business may not be booming at the moment, but Google is the clear-cut choice for businesses looking for a targeted audience.
Beyond ads, Google Cloud is becoming an increasingly important part of the company’s future. Cloud revenue surpassed $3 billion in the second quarter (a 43% improvement from Q2 2019), implying an annual run-rate of $12 billion. Since cloud-service margins are considerably more attractive than ad-based revenue, Alphabet should see its cash flow and profitability tick higher as Google Cloud grows into a larger percentage of total sales.
Among the FAANG stocks, the best value might just be Alphabet.
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