If you plan to make money in investing, you need to learn how to handle the inevitable market crash.
In a perfect world, stocks will be priced based on cold, rational logic.
But that’s not the case in the real world.
Stock prices are the sum of the collective decisions made by millions of human participants.
And as humans, we are all emotional creatures with our own biases.
As a result, share prices and valuations can swing from one extreme to the other.
But as investors, we can choose to focus on the business rather than the share price.
That’s because business fundamentals do not change overnight and are not influenced by emotions.
By focusing on what’s important in investing — the cash flows generated by a strong business, we can safely go about selecting the right stocks for our investment portfolios.
As it turns out, market crashes should be welcomed with open arms as they help to bring valuations down to more palatable levels, allowing long-term investors to scoop up shares with a greater margin of safety.
Here are three stocks that I will be buying when I am next confronted by a market crash.
PepsiCo (NYSE: PEP)
Pepsi probably needs no introduction.
The multinational beverage and snack company boasts an impressive portfolio of brands and products that are sold in more than 200 countries and territories.
Of Pepsi’s wide portfolio of brands, 23 of them generated more than US$1 billion in annual retail sales for 2019.
The company has remained remarkably resilient during the pandemic.
For its third-quarter 2020 earnings, it reported a 5.3% year on year increase in net revenue to hit US$18.1 billion.
Net profit rose 9.5% year on year to US$2.3 billion.
Pepsi has maintained a gross margin of between 52% to 55% over the last decade, a testament to its strong pricing power.
The business also generates consistent free cash flow over this period.
As a result, Pepsi has been able to pay out increasing dividends even through crises.
Dividend per share has doubled from US$1.89 in 2010 to US$3.79 in 2019, a compound annual growth rate of around 8%.
Nike (NYSE: NKE)
Nike is one of the top sports apparel and footwear brands in the world.
The company has a long history of product innovation and has invented groundbreaking new footwear such as the AlphaFly Next% that helps to optimise runners’ efficiency.
During the pandemic, Nike was forced to temporarily shutter its brick-and-mortar stores to curb the spread of the infection.
But what you may not know was that the company made up for the loss of physical footfall by leveraging on its strong online platform.
For its fiscal 2021 second quarter ended 30 November 2020, the company reported an 84% year on year increase in digital sales.
Revenue for the quarter rose 9% year on year to US$11.2 billion, while net profit jumped 12% year on year to US$1.3 billion.
Despite the tough conditions, the company raised its quarterly dividend from US$0.245 per share to US$0.275.
CEO John Donahoe attributes the company’s success to its deep connection with members who sign up using the company’s apps.
Since the pandemic began, Nike has added more than 70 million new members globally.
It has also kept up its pace of new product releases, with new launches of LeBron 18 and Kyrie 7 for basketball selling very well.
Paypal (NASDAQ: PYPL)
Paypal is a leading technology and payment platform company that facilitates digital and mobile payments between merchants and customers.
The company’s business has boomed as the pandemic has pushed more people into adopting online payments.
With shifting habits, this trend looks set to stay as people discover the ease and convenience in using digital methods of payment.
Paypal’s Braintree offers a plethora of payment options for businesses while its Venmo app acts as a digital wallet where consumers can top up money for purchases at approved merchants.
Paypal released its fourth-quarter and full-year 2020 earnings recently.
For the full year, revenue surged 21% year on year to hit US$21.5 billion, while net profit soared 71% year on year to US$4.2 billion.
Total payment volume (TPV) grew 31% year on year to end the year at US$936 billion, representing the strongest performance in the company’s history.
The business also nearly doubled the number of net new active accounts added in 2020 and ended the year with 377 million active accounts.
Free cash flow generation remained solid at US$5 billion.
Paypal expects this momentum to continue into this year as digital adoption was greatly accelerated by the pandemic.
The company anticipates TPV growth of around 20%+ year on year and for around 50 million net new active accounts to be added in 2021.
Disclaimer: Royston Yang owns shares in Nike.