Perhaps I’m a little odd, but I spend at least a couple minutes each day thinking about what the world would be like if we encountered another major event that throws the market into chaos. Would investors react a little more sensibly this time, since we’re not that far removed from the last crisis? Or would they go extra crazy because two big events in six years would cause them to swear off stocks forever?
I was pretty young when the last crisis hit. I remember sitting down at my desk a few times during December of 2008 and running a stock screener for companies trading a low price-to-book ratios that were also under 15 times earnings.
There were hundreds of matches, on both sides of the border.
I picked up a few financials over the next few months because they were hit the hardest, with varying degrees of success. I bought Citigroup at $120 per share (split adjusted), an investment that didn’t work out. But I still did pretty well picking up General Electric at $12 per share and Bank of Montreal at $27 per share. Both positions have since been sold at more than double what I paid.
But for the most part, I didn’t handle the crisis well. I spent too much time watching the talking heads on TV get excited about what was going on. For every guest who said the Great Recession was a terrific buying opportunity, there were 50 who focused on what was going to happen in the next week.
The 2008-09 recession was my first as an investor. Now that I’ve been through one I like to think I’d handle the next one better. I’d look for quality companies that have sustainable competitive advantages, that sold off with the rest of the market. I’d buy and just sit back and wait for things to recover.
These days, most of these quality stocks are expensive. If the market sold off 25%, here’s what I’d be buying.
The future looks bright for Dollarama (TSX: DOL), which has almost 1,000 locations from coast to coast.
The company continues to deliver stellar results. Both revenue and profit had healthy jumps over the last year, and even its existing stores are performing well. This is a nice exception for Canadian retail, where most chains are struggling to grow in a meaningful way.
The only problem with Dollarama? It trades at more than 25 times earnings. If investors could pick up shares for less than 20 times earnings, they’d be nuts not to. The company has too much potential to not buy at those levels.
I think the risk of the Canadian housing market falling and hurting the banks is very real. Obviously, I don’t think we’ll see anything close to what happened to U.S. financials, but it’s very possible that shares of our banks fall by 25%.
If that happens, I’d back up the (armored?) truck on TD Bank (TSX: TD)(NYSE: TD). Not only does the company have a terrific retail banking brand in Canada — the best in the country, in my opinion — but it also has a huge presence in the U.S., which has such a fragmented banking system that there’s bound to be good acquisition opportunities.
The stock currently yields 3.4%. If it fell 25%, the same dividend would yield nearly 4.6%. I’d love to get a brand as strong as TD’s with a dividend yield that generous.
Unlike a lot of investors, I have no problem investing in airlines, with one huge caveat — the price has to be right.
And for years, I’ve watched Westjet (TSX: WJA) do everything right. It’s a terrific operator that manages to treat customers well and keep costs down. It’s slowly expanded out of Canada, first heading south and now east to Europe. And it’s done all this while staying consistently profitable and keeping the balance sheet solid.
If Westjet’s shares sold off, investors would be getting a company that has a terrific brand and domestic protection at a very decent valuation. It’s exactly what investors should be looking for.
Now all we need is for prices to correct.
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Fool contributor Nelson Smith has no position in any stock mentioned in this article.