After the initial pandemic-fueled sell-off frenzy resulted in a drastic decline in markets, the broader stock market seems to be doing well. While many people are still unemployed and businesses operating at less than optimal capacity, the S&P/TSX Composite Index has recovered 42.66% from the March 23, 2020 bottom.
People are getting help from the Canada Emergency Response Benefit (CERB) and benefiting from mortgage and other deferrals. The government also announced an extension to the CERB for another eight weeks. However, there might be darker clouds ahead that investors should be aware of.
Another market crash
The recent market meltdown did not last as long as many experts would have anticipated. The government’s injection of funds into the economy through various measures in their COVID-19 Response Plan seems to have made quite a difference. While the market seems to be on its way to a full recovery, the March crash could be nothing but a trailer for what will come.
It is next to impossible to predict another market crash, but I would not put it out of the realm of possibility. If it does occur, the next crash could be far worse than the one in March. One of the reasons is that many companies are about to begin declaring their second-quarter performances.
In case many companies fall below analyst predictions, another market sell-off frenzy could ensue. The economic position of Canadians is already weak due to the loss of income and closure of businesses. Another crash would see investors lose even more confidence in the stock market.
Using what happened in the March crash, I will discuss a stock that can make an excellent addition to your portfolio to help you recover from the incoming meltdown, and possibly come out a wealthier investor.
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An energy company
Northland Power Inc. (TSX:NPI) is a utility company that I do not typically talk about, but it certainly caught my attention with its recovery from the previous crash. The stock showed an excellent movement in the market after declining to a significant low in March. Since the bottom, the stock has not only recovered its pre-crash value. It is up by 10% of its pre-crash value.
Northland owns and operates a diversified portfolio of natural gas, wind, and biomass power production companies. Its use of alternative and more eco-friendly electricity production makes it a lucrative option to consider. As awareness grows, renewable power is likely to become a more dominant sector, and Northland could be right there among the leading companies.
The company has a five-year Compounded Annual Growth Rate (CAGR) of 22.8%, a decent crash reserve, and a stable balance sheet that can help it weather another crash. When the previous crash took place, Northland Power declined by a massive 35%. Another crash could send its value even lower, but it could make for a more attractive price and dividend yield.
It is challenging to predict whether the next market crash will be worse than the March crash, and chances are that it could have far longer effects on the market if investors entirely lose confidence in the stock market.
It would therefore be wise to consider ditching riskier assets and prepare your portfolio by adding stocks that are likely to recover well and grow substantially after the next crash. To this end, Northland Power could be an ideal addition.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.