For more than 17 months, the benchmark S&P 500 (SNPINDEX:^GSPC) has been unstoppable. Since bottoming out on March 23, 2020, the widely followed index has more than doubled in value. It marks the strongest bounce-back rally from a bear-market bottom in the index’s storied history.
But whether this rally can last is an entirely different story. If we look to history as a guide, it would suggest that there’s a growing chance of a double-digit percentage correction or crash on the horizon.
History may not be the market’s friend in the near term
For example, consider how the S&P 500 has behaved in each of the previous bounce-back rallies from bear market bottoms. In each of the eight previous bear markets (not counting the coronavirus crash), there were either one or two declines of at least 10% within the three years after finding a bottom. What this tells us is that rebounding from uncertainty is a process that often takes time. We’re now 17.5 months into our rebound and have yet to see a double-digit decline in the S&P 500.
Crashes and corrections also tend to be really common. Data from market analytics company Yardeni Research shows there have been 38 double-digit percentage declines in the S&P 500 over the past 71 years. That’s an average drop of 10% (or more) every 1.87 years. Even though the market doesn’t adhere to averages, this does paint a pretty clear picture of how common significant drops can be.
More concerning evidence can be found by examining margin debt — i.e., the amount of money borrowed by investors to buy or short-sell securities. Since the century began, there have been only three instances where margin debt rose 60% or more in a given year. It occurred right before the dot-com bubble burst, right before the Great Recession, and over the past couple of months. If short-term price movements were to work against investors and margin calls are triggered, it could accelerate a move lower in the market.
Lastly, history suggests that extended valuations are worrisome. Last week, the S&P 500’s Shiller price-to-earnings (P/E) ratio closed above 39, which is nearly a two-decade high. The Shiller P/E takes into account inflation-adjusted earnings over the past 10 years. In each of the previous four instances where the Shiller P/E topped and held 30, the S&P 500 subsequently declined by at least 20%.
While none of these points guarantees a crash or steep correction, they do imply a growing likelihood of a significant pullback.
Every single crash or correction is a buying opportunity
On the other hand, every single crash or correction throughout history has proven to be a buying opportunity. Each of the 38 aforementioned double-digit declines in the S&P 500 since 1950 has been erased by a bull market rally. As long as your investment timeline is measured in years, crashes and corrections are the perfect time to buy unstoppable stocks at discount prices.
As someone who’s sitting on more cash now than at any point since I started investing over two decades ago, I’d welcome a crash or correction. In particular, I want to buy or add to the following three unstoppable stocks when the next crash occurs.
Although I already own a stake in e-commerce kingpin Amazon (NASDAQ:AMZN), I’m always looking for a good excuse to add to my position. A crash or steep correction would probably present an excellent opportunity to add to a surefire winner.
Just how dominant is Amazon when it comes to online retail sales? In late April, eMarketer released a report estimating Amazon would see $0.40 of every $1 spent online in 2021 route through its marketplace. That’s more than five times the online retail share of its next-closest competitor, Walmart.
Even though retail is a generally low-margin industry, Amazon has been able to utilize its e-commerce dominance to sign up 200 million people worldwide to a Prime membership. Not only do Prime members spend significantly more than non-Prime customers, but the tens of billions of dollars in annual fees collected from Prime members help Amazon to buoy its margins and undercut brick-and-mortar retailers on price.
What gets too easily overlooked with Amazon is that it’s actually dominant in two categories. On top of being the leading U.S. online retailer, it controls roughly a third of all cloud infrastructure spending via Amazon Web Services (AWS). Since cloud margins are substantially higher than retail margins, AWS, along with subscription services and rapidly growing ad revenue, will help Amazon more than double its operating cash flow by mid-decade.
There’s little doubt in my mind that cybersecurity will be one of the safest double-digit growth trends this decade. As businesses shift their data and that of their customers into the cloud, the onus of protection will increasingly fall onto third-party providers like CrowdStrike. Thankfully, the company’s cloud-native Falcon platform is ready.
Being built in the cloud and reliant on artificial intelligence allows Falcon to identify and respond to threats faster and more cost-effectively than on-premises security solutions. In a typical week, Falcon oversees and assesses 6 trillion events.
CrowdStrike’s operating performance speaks for itself. In less than five years, it’s grown from 450 subscribing customers to more than 13,000, and has consistently retained 98% of its clients. What’s arguably even more impressive is that, in just a shade over four years, the percentage of its clients with four or more cloud-module subscriptions has climbed to 66% from 9%. Having its clients buy additional services is precisely why this company has already achieved its long-term subscription gross margin target despite being in the very early stages of its growth.
The sky’s the limit for CrowdStrike, and any significant discount during a crash should be pounced on.
A third unstoppable stock I’d be thrilled to scoop up during a stock market crash or steep correction is cloud-based customer relationship management (CRM) software provider Salesforce.com (NYSE:CRM).
Just like online retail and cybersecurity, CRM software is a sustainable double-digit growth trend. CRM software is used by consumer-facing businesses to enhance existing client relationships and grow sales. It can handle basic functions like accessing real-time customer info and overseeing customer service issues, as well as more complicated tasks, such as managing online marketing campaigns and running predictive sales analyses on an existing client base. Although CRM software is perfect for the retail and service industries, it’s finding plenty of use in the industrial space, as well as the healthcare and finance sectors.
Salesforce is the unquestioned most dominant player in the CRM space. During the first half of 2020, it was responsible for nearly 20% of all global CRM spending. That’s more than its four next-closest competitors combined. This means Salesforce, like Amazon, has a comfortable market share lead.
Furthermore, Salesforce is thriving under the leadership of CEO and Co-Founder Marc Benioff. Benioff has helped orchestrate a number of earnings-accretive acquisitions, including MuleSoft and Tableau. The latest deal to close, the purchase of cloud-based enterprise communications platform Slack Technologies, will provide another opportunity for Salesforce to cross-sell its products and appeal to small and medium-sized businesses.
With Salesforce on track to more than double sales to $50 billion over the next five years, any sizable dip in its share price should be viewed as a buying opportunity for patient investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.