Will we see a stock market crash in 2020? Nobody knows for sure, but there’s always plenty to worry about.
It’s hard to predict a crash with any precision and on many occasions the market moves in the opposite direction to what we might expect. For example, the main indices can move higher even when the general economic news seems filled with doom and gloom.
What I’d watch
So rather than trying to sell shares to avoid a crash, I think it could be a good idea to build a watch list of shares you’d like to buy if a crash arrives. In other words, follow Warren Buffett’s well-known advice and buy the shares of great companies when others are fearful.
If you do that and purchase at marked-down valuations, there’s a good chance your investment will rise with the share price when the general economic sun starts shining again. And the sun has always come out from behind the clouds before.
My starting point is to have faith in the potential for general economic recovery. If everything crashes and stays down forever, I won’t be concerned with mundane affairs such as investments and money anyway. My focus will likely be more on where the next can of beans is coming from and how much ammunition I have left for my shotgun!
I’d use a market-crash as an opportunity to buy shares in companies with the best businesses I can find. For me, that means the company will have a record of high profit margins, robust returns when measured against equity and capital, and a long history of rising cash flow and shareholder dividends.
The one share I’d love to buy
Above all others, the one share I’d like to buy in a future market crash is the FTSE 100’s premium alcoholic drinks supplier Diageo (LSE: DGE). The firm has all the attributes I’ve described above and a valuation that demonstrates the stock market is well aware of the firm’s quality.
With the share price at 3,075p, the forward-looking earnings multiple for the trading year to June 2021 is around 21 and City analysts expect the dividend to yield 2.5%.
The rate of annual earnings growth is running at mid- to high-single-digit percentages, so we could argue that the valuation looks full. But the company has supported a high rating for as long as I can remember, and that hasn’t stopped the stock rising by almost 200% over the past 10 years.
The business is one of those classic fast-moving consumer goods set-ups. Customers like the brands, remain loyal to them, and return repeatedly to buy more. The outcome is robust cash flow that’s ideal for supporting consistent and rising dividends.
But unlike soap products and food pedlars, I reckon there’s an extra level of customer stickiness with Diageo’s offering because people rarely forego their favourite tipple no matter how grim the general economic outlook becomes.
In the aftermath of the credit-crunch around 2007–08, Diageo’s share price drifted down around 30%. If that happens again, I’d buy some of the shares without hesitation, no matter how worrying the general economic news flow becomes.