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Market Crash 2.0: Approaching the Cliff

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Wall Street is on track to record four straight weeks of losses. Mega-cap tech stocks continue to drop in September 2020 following profit-taking by investors who are shifting to cyclical stocks. Meanwhile, the S&P/TSX Composite Index is also losing steam and is poised to end the month lower versus August.

From its COVID-19 low on March 23, 2020, the rally by Canada’s primary stock market was the fastest on record. Despite surging into the bull zone, analysts see the market approaching the cliff. The coronavirus infection curve has yet to plateau globally. Likewise, the economic pain from lockdowns is starting to show.

Directionless

As of September 25, 2020, the TSX is down 5.85% year to date. Six of the 11 major sectors are in negative territory. The energy sector is underperforming by 54.66%, while the financial sector is lagging by 1.08%. However, technology (39.13%) and materials (23.64%) are the only two sectors that are up double digits.

Amid the uncertainties, Nuvei made history as the TSX’s largest tech IPO. The payment technology company debuted on September 23, 2020, and wrapped up its $833 million IPO. The Canadian dollar lost ground for the third straight week, as the U.S. dollar gains tends to benefit from this volatile market.

According to some analysts, September has been a challenging month. The market is directionless due to a lack of a significant catalyst. However, there are buying opportunities for bargain hunters. The tech sector is the main beneficiary of fast money flowing in and out of the market. Gold prices dropped 4.9% for the week, and based on FactSet data, it was the steepest decline since the pandemic’s onset.

The second wave of COVID-19 infections is lowering optimism around economic recovery. The legislation was passed to replace the Canada Emergency Response Benefit (CERB) with the Canada Recovery Benefit. The measures should buoy public spending.

Resilient business model

The consumer staples sector (+8.81%) is holding up well in September, as it continues to outperform the TSX. Alimentation Couche-Tard (TSX;ATD.B), Jamieson Wellness, and Loblaw are among the sector’s leaders. But Couche-Tard should be prominent on investors’ radars. The leading convenience store operator is reporting fantastic earnings results.

In Q1 of the fiscal year 2021 (ended July 31, 2020), EBITDA increased 27.4% to $1.4 billion compared to the same period in the fiscal year 2020. Adjusted net earnings attributable to shareholders increased by 45%. Total merchandise and service revenues grew by nearly 7% to $3.9 billion. In Canada, Couche-Tard’s same-store merchandise revenues increased by 19.9%.

The business model makes the $51.92 billion company resilient. It continues to maximize cash flows by keeping costs in check while reducing non-critical capital expenditures. Couche-Tard ended the quarter with almost $5.8 billion in available cash and an unutilized operating credit facility.

Market analysts recommend a buy rating for Couche-Tard, given its financial and operational strength. This consumer-defensive stock also pays a 0.60% dividend.

Serious threats

We’re under abnormal times, and therefore, another market crash is a possibility. COVID-19 is still the major threat, although the coming presidential elections in the U.S. could further destabilize the market.

Speaking of a potential market crash 2.0...

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC.

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