Stocks have had a remarkable run over the past few years. Even after the market had to climb back from the dive, it endured in early 2020 S&P 500 has doubled in value over the past five years.
Of course, nothing lasts forever, and with many stocks approaching their everyday highs, and the market looking frothy, there is more and more gossip about the next crash.
No one can know exactly what Wall Street is going to do the next day, week, month or year. But it seems like it’s a good time to at least plan for the possibility of an economic downturn, and to consider in what stocks you might want to defend if the market goes south.
This is why three fools believe Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Ford Motor (NYSE: F), en General dynamics (NYSE: DG) seems like good stocks to own through a downturn.
Image Source: Getty Images.
When the tide disappears, you will be glad you swam with the master.
Lou Whiteman (Berkshire Hathaway): Warren Buffett’s Berkshire Hathaway has outperformed the wider market over the past five years, leaving some wondering if the Oracle of Omaha lost its fast ball.
Berkshire has added some tech stocks, including appeal (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) its investments over the past few years, but its portfolio is not designed to compete with the kind of NASDAQ-powered technology rally we’ve seen. However, it is well set to survive a downturn, with wide exposure to a number of sectors that tend to hold up, even as the tech sector is sinking.
Berkshire Hathaway earns a significant amount from the insurance and utility industry, which in a good time is not particularly sexy, but which is going badly due to their steady income streams. It also owns Burlington Northern Santa Fe, one of the two major railroads serving the Western United States.
The company’s equity portfolio includes a variety of value investments, including a basket of the largest banks in the country. Coca-Cola (NYSE: KO), a supermarket operator Kroger (NYSE: KR). Berkshire also has more than $ 140 billion in cash that it can use to buy assets if stock prices fall.
The bottom line is the best thing you can do to prepare for a downturn is to buy a basket of quality ventures, and remember not to panic when the bear comes up. Buy Berkshire offers you the diversification, with the added benefit of having steady hands overseeing the portfolio.
Buffett in his 2004 letter to shareholders compared the investment to swimming in the ocean, saying “only when the tide goes out do you discover who swam naked.” Expect no surprises with Berkshire.
One of 2009’s best stocks could be great again if the market collapses
John Rosevear (Ford Motor): Ford and its longtime investors learned a lot from the huge market crash of 2008 and early 2009. Among other things, Ford learned how important it is to have a large cash reserve that could help it continue developing new products while competitors have reduced budgets – and investors have learned (or re-learned) that shares of automakers with fresh produce tend to rise early in economic recovery.
2020 was a difficult year for the global automotive industry, but Ford went through it well. It incurred considerable new debt after shutting down its factories last year because it remembered the lesson about cash in a crisis. But it turns out that Ford did not need the reserve: by the end of the year, the cash on hand exceeded its debt by almost $ 7 billion.
The F-150 pickup is Ford’s most lucrative product. This is especially profitable if it has just received a full update. Image source: Ford Motor.
Ford’s prospects for 2021 are pretty clear, with one caveat that we’ll be getting to in a moment. The company is taking stock of its brand new F-150, its most profitable product (and a product that is extra profitable in the first year after a redesign.) Ford has also started delivering the compact off-road vehicle. Bronco Sport and the electric Mustang Mach-E, it has the larger Bronco coming mid-year, and the delivery of the important battery-electric Transit commercial van (called e-Transit) begins this fall.
That reservation? Due to the huge demand for new personal computers due to the need for social distance, there is a worldwide shortage of microchips – and it is also used in modern vehicles. As a result, a number of global automakers, including Ford, have reduced key model production. At present, it is not clear whether the deficit will ease in a few weeks and whether it may last for a few months. This is something car investors should consider.
I still think Ford would be an excellent stock if the market crashed this year. Yes, the share price will drop for a while. But the carmaker’s solid cash flow and strong product pipeline should help it (and then some) recover ahead of the overall market, just as in 2009 and 2010.
This defense stock has endurance … and firepower
Rich Smith (General dynamics): The rise of the stock markets and the collapse of the stock markets. In good times and bad, though, I think you can rely on a reasonably priced defensive stock to hold up fairly well – which is why I would suggest investing in General Dynamics today.
What makes a defense stock “reasonably priced?” I have long argued that the natural valuation for such companies has historically been a price equal to their annual sales, and General Dynamics shares are currently trading close to that. One of the cheapest defense stocks on the market, the price-to-sales ratio is now around 1.1. Measured by earnings, its shares sell 13.8 times the profit. (Compare this with the price-to-earnings ratio of 39 for the now too expensive S&P 500).
Of course, even the cheapest stock is not a big bargain if there are no growth prospects. So, how does General Dynamics compare in this regard?
General Dynamics, probably best known for its M1 Abrams Main Battle Tank, has been a stalwart of the defense industry for decades, but I think the other units of the company can perform even better than the combat systems division, which manufactures the tanks.
Its aviation industry, for example, does not make the fighter jets or bombers you would expect from a defense contractor. It delivers Gulfstream business jets, which may have just become a little more appealing to drivers who want to fly in the middle of a pandemic. And the General Dynamics Marine Systems Division (which do focus on military products) is perfectly positioned to take advantage of the U.S. Navy’s long-haul plan to grow its navy by more than 20% to 355 ships.
Supported by growth in these two segments in particular, analysts predict that General Dynamics will increase its earnings by approximately 10% in each of the next three years. For a 13.8 P / E stock that pays a dividend yield of 2.9%, it seems about right to me.