Stock market crash: 3 absolute bargains just waiting to be bought
Buckle up, because volatility is back in full force on Wall Street.
On Thursday, May 5, just a day after the Federal Reserve raised interest rates by their biggest amount in two decades (50 basis points), all major indices crashed. Although “crash” is a bit of a subjective term, the nominal and percentage declines of all indices sent shockwaves through Wall Street.
When the closing bell rang, dependent technology Nasdaq Compound (^IXIC 0.00%) recorded its third largest daily decline in its history (647.16 points) and, at its peak, the intraday decline was down 6.01%. A decline of 6.3% (at the close) would have ranked among the 20 largest percentage declines in history.
Things weren’t much better for reference S&P500 (^GSPC -0.57%) or iconic Dow Jones Industrial Average (^ DJI 0.00%), which fell 153.30 points and 1,063.09 points respectively, although less than the Nasdaq Composite in percentage terms. For the S&P 500 and the Dow Jones, these are their sixth and ninth largest nominal single-day point losses in history.
Stock market crashes, corrections and bear markets can be scary. They are unpredictable, can cause stocks to drop sharply, and can touch the hearts of investors.
But steep declines in the broader market are also a great opportunity to pick up high-quality stocks at a discount. Even though the S&P 500 has suffered 39 double-digit percentage declines since the start of 1950 – this equates to a double-digit correction occurring, on average, every 1.85 years – each of the previous 38 corrections, not counting the ongoing decline, were wiped out by a bullish rally. In other words, if you buy big companies and let your investment thesis take shape over time, your chances of growing your wealth are very good.
These stocks look like glaring bargains
With the market crashing, a number of innovative and proven companies stand out as absolute bargains just waiting to be bought. Here are three such companies.
The first heavily discounted cheap stock just begging to be bought by opportunistic investors is money center bank Wells Fargo (WFC -0.47%).
Shares in the company have lost about a quarter of their value in the past three months. Since bank stocks are cyclical, there are fears that historically high inflation could push the US economy into recession. Of note, first quarter US gross domestic product (GDP) fell 1.4%.
The other problem is that Wells Fargo admitted in 2017 to opening 3.5 million fake accounts at the branch level between 2009 and 2016. This immediate loss of trust at the consumer level, along with the revolving door it created as CEO, don’t This doesn’t help Wells Fargo’s valuation.
However, Wells Fargo paid his penance in the form of fines to the United States Department of Justice and the Securities and Exchange Commission. While these fines do not undo corporate wrongdoing, history has repeatedly shown that bank customers have short memory spans. For example, it didn’t take long for Bank of America to begin increasing loans and deposits soon after the financial crisis and its attempt to charge monthly fees for using debit cards.
More importantly, the cyclical nature of banks is precisely what makes them so attractive during stock market crashes and economic downturns. Even though recessions are inevitable, they usually don’t last more than a few months to a few quarters. By comparison, economic expansions often last for years. Bank stocks are perfectly positioned to benefit from this natural expansion of the American economy.
Wells Fargo should also benefit from the Federal Reserve’s change in monetary policy. Although higher interest rates tend to slow the US economy, it means Wells Fargo can earn more net interest income on its outstanding variable rate loans. This increase in net interest income is expected to boost earnings by 24% next year.
Investors have the option to buy Wells Fargo right now for just above its book value and for less than 9 times earnings for the coming year.
A second bargain that investors can buy with confidence as the market sells off is the marijuana stock. Trulieve Cannabis (TCNNF 8.82%). Shares have lost nearly three-quarters of their value since hitting a record high 14 months ago.
Pardon the over-the-top pun, but expectations for pot stocks were high with Democrats in control of Congress. After President Joe Biden’s victory in November 2020, it was expected that cannabis would be legalized federally, or at worst, we would see cannabis banking reforms take shape. Sadly, no marijuana reform was passed, leaving Wall Street to punish multi-state operators (MSOs) like Trulieve Cannabis.
However, driving America’s pot stocks to the stake doesn’t make much sense given that three-quarters of all states have legalized weed in one way or another, including 18 states that have permitted consumption. by adults. As long as the federal government allows states to regulate their own industries, organic opportunities for MSOs abound.
What makes Trulieve Cannabis so unique among MSOs is its expansion. While most MSOs have opened dispensaries and grow facilities in as many legalized states as possible, Trulieve has, until last year, focused almost exclusively on Florida. The Sunshine State is a legal market for medical marijuana, and Trulieve controls about half of all flower and cannabinoid oil sales.
Why saturate Florida? In addition to being one of the highest-paying cannabis markets in the country, the saturation of the Sunshine State allows Trulieve to increase brand awareness without spending a lot of money on marketing. As a result, Trulieve became profitable over three years ago.
Another reason Trulieve is such an incredible buy is its acquisition of MSO Harvest Health & Recreation, which closed last year. While this deal negatively impacted the company’s fourth quarter operating results with a number of one-time expenses, it ultimately puts Trulieve in the driver’s seat, in terms of market share, in Arizona. Cannabis sales in Arizona are expected to eventually exceed $1 billion on an annual basis.
The company’s shares are currently changing hands at 20 times earnings for the coming year despite a sustained growth rate of 20% or more.
A third absolute bargain that opportunistic investors would do well to buy as the market declines is the auto giant General Engines (GM -0.93%).
Wall Street has held back the auto industry for a variety of reasons. There have been production shutdowns and delays related to supply chain challenges, shortages of semiconductor chips for next-generation vehicles, and now there’s the prospect of higher interest rates slowing demand for loans for new vehicles. The icing on the cake is that the automotive industry is cyclical. This means that the negative first-quarter GDP impression is particularly negative for domestic automakers like GM.
But long-term investors have a lot to like about General Motors, even if the next two months prove difficult. For example, the company’s long-awaited boost in the organic growth arm has arrived. The electrification of consumer vehicles and business fleets is expected to lead to a decades-long vehicle replacement cycle that will allow GM to both gobble up electric vehicle (EV) market share and grow its operating margins.
GM last year increased its spending commitment on electric vehicles, autonomous vehicles and battery research to $35 billion through 2025. GM CEO Mary Barra predicts her company will produce more one million electric vehicles per year in North America by the end of 2025. In addition, two battery production plants are expected to be online by the end of next year.
What was particularly noteworthy in Barra’s latest quarterly letter to shareholders is that there were more than 140,000 reservations for the Chevy Silverado EV. Barra only introduced the 2024 Silverado EV in January. That’s a pretty incredible jump in bookings for a high-margin EV.
General Motors is also weighed down in the very short term by the COVID-19 blockages in China. In each of the past two years, GM has delivered 2.9 million vehicles (mostly combustion engine vehicles) to the world’s largest auto market. With existing brand visibility and infrastructure, GM should have a path to significant EV market share in China.
Even though auto stocks are trading at low price-to-earnings ratios, General Motors looks historically cheap. Shares can currently be bought for around 5.7 times earnings for the coming year despite the company’s sales growing faster than it has in a long time.