“Be greedy when others are fearful.” This Warren Buffett quote captures the US billionaire’s approach to investing. When the market crashes, you’ll usually find him buying up good businesses at bargain prices.
I share Buffett’s view that market crashes can provide great buying opportunities. I think the secret is to focus your cash on companies that offer essential products and have long track records. These normally recover quite quickly.
Today, I want to look at three companies I’d hope to buy in the next market crash.
Everyday health
We’ve all got products such as Strepsils, Nurofen, Gaviscon and Harpic in our cupboards. These — and dozens of other popular brands — are produced by FTSE 100 consumer goods group Reckitt Benckiser (LSE: RB).
Reckitt has been going through a tough patch in recent years. The group’s £65 share price is already some way below the £80 peak seen in 2017. Despite this, the shares still aren’t exactly cheap. At current levels, they’re trading on 20 times forecast earnings, despite City analysts forecasting flat profits this year.
The group’s 25% operating margin is a big attraction and deserves a strong valuation, in my view. If new boss Laxman Narasimhan can cut debt and restart growth, I’d expect the shares to do well. But for now, I feel they’d be vulnerable in a market crash. That could provide patient investors with a great buying opportunity.
Essential resources
Another sector where I’d be keen to buy during market crashes is the natural resources sector – oil and mining. These may be unfashionable, but the world economy remains heavily reliant on supplies of raw materials such as copper, iron ore, oil and gas.
One company that provides all of these at scale is BHP Group (LSE: BHP). This Anglo-Australian firm reported revenue of £44bn last year, on which it made a profit of £8.3bn.
I already own a few of these shares, which currently offer a dividend yield of 6.4%. This tasty income attracts me, but I’m aware profit margins are at the top end of the historic range achieved by the group. A global slowdown could cause commodity prices to fall, cutting into BHP’s profits.
Indeed, forecasts for 2020/21 suggest the group’s earnings will fall by 10% over the coming year. I remain happy to hold BHP and wouldn’t mind buying more. But I’m saving myself for the next big slump, when I hope to buy big at much lower prices.
Forget the fear factor
Before last year’s general election, utility stocks such as National Grid (LSE: NG) were trading at battered valuations. Investors were worried about Labour nationalisation plans and the risk that growing renewable generation would make these centralised operators redundant.
I reckon both fears were overstated. National Grid looked good value to me at 800p. I’m less tempted now the stock has climbed over 1,000p, as this has pushed the dividend yield below 5%.
National Grid probably will need to invest heavily to support distributed power generation. But I’m pretty certain the UK will continue to need a power grid that connects everyone together. It’s also worth remembering this group now generates about half of its profits in the US, providing useful diversification.Â
I think the risks facing National Grid are probably overstated. This utility stock would certainly be on my buy list in a market crash.