If the stock market drops by 20% or more, it’s referred to as a bear market. If I see a drop of that scale in coming months, I want to be ready. This should throw up some good buying opportunities. With that in mind, here are the FTSE 100 stocks that are on my watch list.
Aiming for undervalued bargains
The first area I want to focus on is stocks that are already down. If I see a subsequent 20% drop from already discounted levels, I think some will fall into undervalued territory.
For example, I’d consider buying Taylor Wimpey and Barratt Developments. Both homebuilders have taken a tumble in the short term, down 12% and 13%, respectively, in the past month. If another drop occurs in the coming few months, it would push both to fresh 52-week lows.
I understand why cyclical sectors like housing are struggling at the moment. When the economy booms, so does property, and vice versa during a crash. Higher interest rates also make it harder for people to afford to buy via a mortgage.
Yet as a long-term investor, another drop would allow me to buy these companies at historically cheap levels. I can then hold and wait for the next cycle to begin. Sure, this might take a year or more, but I’m confident in saying that during the next market recovery and growth spurt, these are two stocks that should outperform versus current prices.
Picking up solid FTSE 100 stocks
Another angle is for me to note companies that are outperforming at the moment. With a stock market sell-off, even good shares can get caught up in negative sentiment on the part of investors who are fearful. So if a fundamentally sound business experiences this, I think it’s a great dip to buy.
Both HSBC and AstraZeneca share prices have gained over 30% in the past year. The global bank has benefited from higher revenue due to interest rate hikes. AstraZeneca saw a jump in interim revenues and recently secured approvals for a promising breast cancer drug.
I feel both companies have momentum, and so if a short-term hit comes to either share price, I’ll be keen to step in.
Neither company is crash-proof, of course. A risk is that whatever causes the crash could negatively impact operations. For example, a slump caused by spiraling living costs could see HSBC hit with more loan defaults. Yet I’m not going to speculate on this at the moment, and will make a clearer judgment call at the time.
Being ready now
In order to take advantage of a potential crash, I’m making sure that I keep a bit of extra liquidity on hand. This will enable me to have a buffer to buy the FTSE 100 gems I want when the prices get to the right levels.