Yahoo Finance Buying These 2 Stocks Is a Good Way to Hedge Against a Market Crash
Written by Andrew Button at The Motley Fool Canada
Are you worried about a stock market crash?
Going by social media sentiment, you’re not alone. The term “market crash” was all over social media this week, trending on Twitter and elsewhere.
On Wednesday, the S&P 500 fell 1.4%, and the TSX fell 1.53%. These were not enormous crashes by any stretch of the imagination, but the first half of 2023 saw a remarkably steady appreciation in stocks. The sudden volatility apparently took many people by surprise. Also, the NASDAQ-100, a U.S. index that houses all of the widely owned big tech stocks, slumped 2.2%, which is a relatively big one-day move.
There are some reasons to believe that stock market volatility is coming. While I wouldn’t say we’re headed for a dramatic “crash,” a correction would be in order. The U.S. markets currently trade at about a 30 price-to-earnings ratio, which is high by historical standards. At the same time, big tech companies — the biggest S&P 500 components — have not grown since 2021. So, perhaps a little dip would be justified.
In that case, what should you invest in? The easy answer would be to say “Guaranteed Investment Certificates (GICs),” but modern portfolio theory says you need a combination of stocks and bonds at all times. A 100% allocation to bonds and bond-like instruments such as GICs won’t cut it. You need at least some equity exposure in your portfolio. With that in mind, here are two stocks that are uniquely well positioned to survive the next market crash.
Fortis
Fortis (TSX:FTS) is a Canadian utility stock that has shown remarkable resilience in the face of stock market crashes. In the 2008/2009 recession, it delivered positive earnings growth. It was the same story with the 2020 COVID-19 market crash: the company’s earnings grew slightly, despite the economy contracting in the same period. Fortis’s stock price declined in 2008/2009 and 2020, as almost all stocks did, but it declined less than the broader markets.
What makes Fortis so resilient?
First of all, it’s a utility, and all utilities enjoy stable revenue. Heat and light are essential services and are tied to peoples’ houses — you can’t easily cancel these bills. Furthermore, heating and light are among the last things people would cancel if they could.
Second, Fortis has invested more in growth than other utilities have, acquiring assets across Canada, the U.S. and the Caribbean. The result has been a somewhat better long-term track record than the average utility can boast.
Dollarama
Dollarama (TSX:DOL) is a Canadian discount retailer/dollar store. It is well known for having some of the cheapest prices in the country on items like soda, popcorn, and Kraft Dinner. Wal-Mart is generally considered a low-cost retailer, but Dollarama has it beaten by a country mile in some product categories.
Dollarama, like Fortis, tends to do pretty well during market crashes. In 2020, the year of the COVID crash, the company’s revenue grew 6.7%, and its earnings per share increased 7.22%. It was a pretty impressive showing. In 2020, many companies shrank or even became unprofitable — Dollarama actually grew!
It’s not hard to see why. As a discount retailer, DOL attracts many cash-strapped buyers when times are tough. So, if we see a market crash brought on by a recession, Dollarama may perform well. On the other hand, the stock would have no particular catalysts if we entered a tech-led selloff driven by valuation concerns, so this is really a macroeconomic stock idea more than anything else.
The post Buying These 2 Stocks Is a Good Way to Hedge Against a Market Crash appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis and Walmart. The Motley Fool has a disclosure policy.
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