Buckle up, because volatility is back in a big way on Wall Street.
Last Thursday, May 5, just one day after the Federal Reserve raised interest rates by the largest amount in two decades (50 basis points), all major indices crashed. Although “crash” is a bit of a subjective term, the nominal and percentage declines in all the indices sent shock waves all over Wall Street.
When the closing bell rang, the techies Nasdaq Composite (^IXIC 0.00%) posted its third-largest daily point decline in history (647.16 points), and at its peak intraday decline was down 6.01%. A drop of 6.3% (at the close) would have placed it as one of the 20 largest percentage drops in history.
Things weren’t much better for the benchmark S&P 500 (^GSPC -3.20%) or iconic Dow Jones Industrial Average (^ DJI -1.99%), which fell 153.30 points and 1,063.09 points, respectively, although less than the Nasdaq Composite in percentage terms. For the S&P 500 and the Dow Jones, it marked their sixth and ninth largest single-day nominal point losses in history.
Stock market crashes, corrections, and bear markets can be scary. They are unpredictable, can lead to sharp declines in stocks, and can touch the hearts of investors.
But big drops in the general market are also an excellent opportunity to buy high-quality stocks at a discount. Although the S&P 500 has suffered 39 double-digit percentage declines since the early 1950s, this equates to a double-digit correction occurring, on average, every 1.85 years for each of the previous 38 corrections, not counting the decline. ongoing, have been wiped out by a bull market rally. Put another way, if you buy big companies and allow your investment thesis to take shape over time, your chances of increasing your wealth are very good.
These stocks look like screaming bargains
With the market crashing, a number of innovative and time-tested companies stand out as absolute bargains just begging to be bought. What follows are three of those companies.
The first deeply discounted bargain stock that is crying out to be bought by opportunistic investors is the money center bank. fargo wells (WFC -1.32%).
The company’s shares have lost about a quarter of their value in the last three months. Because bank stocks are cyclical, there is concern that historically high inflation will push the US economy into a recession. It is worth noting that the US gross domestic product (GDP) for the first quarter fell by 1.4%.
The other problem is that Wells Fargo admitted in 2017 to having opened 3.5 million fake accounts at the branch level between 2009 and 2016. This immediate loss of confidence at the consumer level, as well as the revolving door it created in the position of director executive, it didn’t help the valuation of Wells Fargo.
However, Wells Fargo has paid its penance in the form of fines to the US Department of Justice and the Securities and Exchange Commission. While these fines do not negate the company’s wrongdoing, history has shown time and time again that bank customers have poor memory. For example, it didn’t take long for Bank of America to start ramping up loans and deposits shortly after the financial crisis and its attempt to charge a monthly fee for debit card use.
More importantly, the cyclical nature of banks is precisely what makes them so attractive during market downturns and economic downturns. Although recessions are inevitable, they usually don’t last more than a few months or a couple of quarters. By comparison, economic expansions often last for years. Bank stocks are perfectly positioned to take advantage of this natural expansion of the US economy.
Wells Fargo should also benefit from the Federal Reserve’s change in monetary policy. Although higher interest rates tend to slow the US economy, this means Wells Fargo can earn more net interest income on its outstanding variable-rate loans. This increase in net interest income is forecast to boost earnings 24% higher next year.
Investors have the opportunity to buy Wells Fargo right now for just above its book value and for less than 9 times earnings for the year to come.
A second screaming bargain that investors can confidently buy as the market sells off is marijuana stocks. Cannabis Trulieve (NFNC -3.85%). The shares have lost about three-quarters of their value since hitting an all-time high 14 months ago.
Pardon the exaggerated pun, but marijuana stock expectations were high with Democrats in control of Congress. Following the victory of President Joe Biden in November 2020, it was widely expected that cannabis would be legalized at the federal level or, at worst, we would see banking cannabis reforms take shape. Unfortunately, no marijuana reforms have passed, leaving Wall Street to punish multi-state operators (MSOs) like Trulieve Cannabis.
However, putting US marijuana stocks in the woodshed doesn’t make much sense given that three-quarters of all states have legalized marijuana in some way, including 18 states that have approved adult use. As long as the federal government allows individual states to regulate their own industries, organic opportunities for MSOs will abound.
What makes Trulieve Cannabis so unique among MSOs is how it spreads. While most MSOs opened dispensaries and grow facilities in as many legal states as possible, Trulieve’s focus, until last year, was almost exclusively on Florida. The Sunshine State is a legal medical marijuana market, and Trulieve controls about half of all flower and cannabinoid oil sales.
Why saturate Florida? In addition to being one of the highest dollar cannabis markets in the country, saturating the Sunshine State allows Trulieve to increase brand awareness without spending a lot of money on marketing. As a result, Trulieve became profitable more than three years ago.
Another reason Trulieve is such an incredible buy is the acquisition of MSO Harvest Health & Recreation, which closed last year. While this deal negatively impacted the company’s fourth quarter operating results with a number of non-recurring expenses, it ultimately puts Trulieve in the driver’s seat, in terms of market share, in Arizona. Cannabis sales in Arizona should eventually top $1 billion annually.
The company’s shares are currently changing hands at 20 times earnings a year ahead despite a sustained growth rate of 20%, if not more.
A third absolute bargain that opportunistic investors would do well to buy as the market dips is the auto giant general motors (GM -3.33%).
Wall Street has put the brakes on the auto industry for a variety of reasons. There have been production stoppages and delays related to supply chain challenges, shortages of semiconductor chips for next-generation vehicles, and now there’s a chance higher interest rates will slow demand for new vehicle loans. The icing on the ice cream is that the auto industry is cyclical. This means that the negative Q1 GDP print stands out as particularly negative for domestic automakers like GM.
But there are plenty of things that long-term investors like about General Motors, even if the next few months prove challenging. For example, the company’s long-awaited organic growth boost has arrived. The electrification of consumer vehicles and business fleets should lead to a multi-decade vehicle replacement cycle that allows GM to gobble up electric vehicle (EV) market share and increase its operating margins.
Last year, GM increased its spending commitment on electric vehicles, autonomous vehicles and battery research to $35 billion through 2025. GM CEO Mary Barra anticipates her company will produce more than 1 million electric vehicles a year in North America by the end of 2025. Additionally, two battery production facilities should be online by the end of next year.
What was particularly noteworthy about Barra’s latest quarterly letter to shareholders is that there were more than 140,000 reservations for the Chevy Silverado EV. Barra only introduced the 2024 Silverado EV in January. That’s a pretty incredible increase in reserves for a high-margin EV.
General Motors is also being affected in the very short term by the COVID-19 lockdowns in China. In each of the last two years, GM has delivered 2.9 million vehicles (mostly combustion engine vehicles) in the world’s largest auto market. With the brand visibility and infrastructure in place, GM should have a path to a sizable share of the electric vehicle market in China.
Despite auto stocks trading at a low price-earnings ratio, General Motors looks historically cheap. Currently, the shares can be bought for about 5.7 times earnings for the year ahead, even though the company’s sales are growing faster than they have in a long time.