While it’s impossible to say when the next stock market crash will come, it always pays to get ready for it in advance.
When share prices plunge, many investors lose their bearings. Some race to sell, but that’s usually a losing strategy, as all they do is crystallise their losses.
Personally, I prefer to buy shares when markets crash, as it means my favourite stocks are suddenly available at bargain prices. I think it’s a good opportunity to buy good, solid, reliable companies that are usually in demand and expensive as a result.
I like buying cheap stocks
In a crash, good companies often get sold off with the bad. Often, they are the first to recover too. In the interim, there’s my buying opportunity.
I’m keen to buy FTSE 100 spirits giant Diageo (LSE: DGE) but it looks too pricey for me today. A stock market crash could soon change that.
This is one of the best defensive stocks on the FTSE 100. People still find money to spend on booze in times of economic trouble, possibly even more than before.
Better still, Diageo has massive international diversification, operating in markets I barely knew existed. This means that if one part of the global economy struggles, the revenues keep rolling in from elsewhere.
Diageo is admired for its raft of top international brands such as Baileys, Guinness, Johnnie Walker, Smirnoff and Tanqueray. It also offers a host of lesser-known local brands too, in Nigeria, India, South Africa and beyond.
It is also making a splash at the luxury and pricey end of the drinks market, with its Premium-plus brands contributing 57% of reported net sales and 65% of organic net sales growth. A global recession could slow the rate of growth, or it even reverse it.
I think the biggest long-term risk is that alcohol falls out of fashion. A growing number of younger people don’t touch the stuff, and Diageo’s sales would dry up if the trend continues.
Timing the market is tricky
There are two things stopping me from buying Diageo today. The first is that the stock is expensive, trading at 23.9 times earnings, against the 15 times usually seen as fair value. The second is that its forecast yield is low at just 2.2% a year. That’s roughly half the forecast yield of 4.2% for the FTSE 100 as a whole.
Lately, I’ve been targeting dirt cheap FTSE 100 stocks with sky-high yields, and Diageo is the opposite of that. That’s fair enough. It’s a premium stock and I should expect to pay a premium price. Also, it has a great long-term track record of delivering both share price and dividend income growth.
Yet I would much rather buy it at a discounted price and with a higher yield, and that is only really likely to happen if we suffer a stock market crash. So I will bide my time and focus my energies on hoovering up those cheap dividend stocks I just mentioned. Then when the crash comes, I’ll pounce.
My strategy is far from infallible. I have no idea when the market will crash, and may have no money to invest when it does. Diageo may still be expensive. Ultimately, I might just have to pay full price for it. We’ll see.
The post This is the first FTSE 100 stock I’ll buy in the next stock market crash appeared first on The Motley Fool UK.
Don’t miss this top growth pick for the ‘cost of living crisis’
While the media raves about Google and Amazon, this lesser-known stock has quietly grown 880% – with a:
Greater than 20X increase in margins
Nearly 60% compounded revenue growth over 5 years – more than Apple, Amazon and Google!
A 3,000% earnings explosion
Of course, past performance is no guarantee of future results. However, we think it’s stronger now than ever before. Amazingly, you may never have heard of this company.
Yet there’s a 1-in-3 chance you’ve used one of its 250 brands. Many are household names with millions of monthly website visitors, and that often help consumers compare items, shop around and save.
Now, as the ‘cost of living crisis’ bites, we believe its influence could soar. And that might bring imminent new gains to investors who’re in position today. So please, don’t leave without your FREE report, ‘One Top Growth Stock from The Motley Fool’.
Claim your FREE copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#FFFFFF’);
})()
More reading
Why I love Diageo stock
A high-quality FTSE 100 share I’d snap up in May
Warren Buffett upped his Diageo shares by 100%! Time to buy?
Forget Bitcoin! I’d rather buy FTSE 100 stocks and aim for decades of passive income
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.