Almost two years ago, the markets were in a frenzy on Wall Street. And the markets have been in a frenzy ever since. Dow Jones Industrial Average (DJI: ^DJI)standard Standard & Poor’s 500 (SNPINDEX: ^GSPC)and nutritious growth Nasdaq Composite (NASDAQ: ^IXIC) Prices bottomed out in October 2022, but have all continued to record multiple record highs.
While history has proven unequivocally that patience pays off handsomely on Wall Street, it also tells us that stocks rarely move up in a straight line. The potential for a big stock decline appears to be growing, which could open up meaningful opportunities to buy stakes in high-quality companies at discounted prices.
Ingredients for a Stock Market Downturn Do Out
Let me start this discussion by saying that it is impossible to predict with any concrete, long-term accuracy, when stock market corrections will begin, let alone how far the Dow, S&P 500, and Nasdaq Composite will fall. However, corrections, Bear marketsEven crashes are a natural and inevitable part of the investment cycle.
As much as investors have enjoyed the relatively steady rise of the broader market since October 2022, the catalysts for a downturn Do Out.
Wall Street, on the other hand, was driven by the euphoria surrounding AI. And while the “Big Seven” spent a small fortune on hardware to power AI-accelerated data centers, the reality is that no major innovation has come along in three decades. We have avoided the early role bubble..
No matter how disruptive or innovative a trend is, investors always overestimate the rate of adoption and utility of new technologies. As cracks appear in NvidiaShield, it seems like a matter of whenno ifThe AI bubble will burst.
Valuation is another undeniable concern for Wall Street.
By the closing bell on July 26, the S&P 500’s price-to-earnings (P/E) ratio — also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio) — stood north of 35, more than double its average of 17.14, when tested at 1,871.
More significantly, there have been six occasions in 153 years when the Shiller P/E ratio has exceeded 30 during a bull market. And all five of those instances were ultimately followed by declines ranging from 20% to 89% in the S&P 500, the Nasdaq Composite, or the Dow Jones Industrial Average.
Although the Shiller price-to-earnings ratio is not a timing tool, it is a predictor of a significant decline in Wall Street’s major stock indexes.
Other factors, such as the longest inversion of the Treasury yield curve in history, as well as the first significant decline in the U.S. M2 money supply since the Great Depression, add fuel to the fire that a double-digit percentage decline is justified on Wall Street.
While stock market declines can be annoying over short periods, in the past they have paved the way for patient investors to buy amazing stocks at discounted prices. If the stock market falls in the coming weeks, months or quarters, I will seek to double my current stake in the following three stocks.
Visa and MasterCard
My biggest regret regarding my investment portfolio isn’t selling a stock too soon or buying a stock that turned out to be a huge loser. It’s not making payments easy. visa (NYSE: V) And Master Card Credit Card (NYSE: MA) My essentials when I first bought them during the COVID-19 crisis in 2020.
Like most financial stocks, Visa and MasterCard stocks are cyclical. That means they will move in tandem with the health of the U.S. and global economies. While economic downturns and recessions are natural and inevitable, they are short-lived.
Only three of the twelve recessions since the end of World War II have lasted twelve months, meaning Visa and MasterCard are well positioned to benefit from the steady increase in consumer and business spending during long periods of economic expansion.
Both companies offer vast Visa’s recently released third-quarter financial results showed 14% growth in currency-neutral cross-border payments volume. Meanwhile, Mastercard grew 18% in constant-currency cross-border payments volume in the quarter ended March. Whether organically or through acquisitions, Visa and Mastercard have a long way to go to expand their payments infrastructure in fast-growing, but chronically underserved, emerging markets.
Both companies have also avoided the temptation to venture into lending. By focusing solely on facilitating payments, Visa and Mastercard avoid the direct hit to lenders from loan losses and credit defaults. Not having to allocate capital during periods of economic turmoil is a competitive advantage that can’t be overstated.
Moreover, Visa and Mastercard’s stock prices remain reasonable. While their forward price-to-earnings ratios of 23 (Visa) and 26 (Mastercard) are higher than the S&P 500 forward price-to-earnings ratio, Visa and Mastercard are growing faster than the S&P 500 average, trading at discounts of 19% (Visa) and 34% (Mastercard), respectively, to their average forward annual earnings multiples over the past five years.
Visa and Mastercard combined account for less than 1% of my invested assets. If the stock market goes down, I will look to double my stake in both companies.
Fiverr International
The third stock I plan to double down on if the stock market goes down is a company that is already in my top 20 holdings (for context, I own stakes in 37 companies at the time of this writing). I’m talking about the online services market. Fiverr International (NYSE: FVRR).
It’s no secret that the U.S. labor market and economy are often constrained. If economic activity weakens or a recession sets in, it’s perfectly normal for the unemployment rate to rise. This means that Fiverr is cyclical and will ultimately benefit from periods of economic expansion that last much longer than periods of contraction.
But there’s more to Fiverr than just long, disproportionate periods of economic expansion over the long term.
On a macro level, Fiverr stands to benefit from the shift in the job market post-pandemic. While some workers have returned to their office jobs, more people are working remotely than ever before. A more remote workforce is a boon for Fiverr’s online marketplace for freelancers.
While there are a number of online gig sites for job seekers and freelancers to choose from, Fiverr stands out. Instead of following the herd and allowing freelancers to price their services on an hourly basis, freelancers on Fiverr price their jobs as completed tasks. This is a more cost-transparent way for freelancers to market their services, and it has resonated with buyers. Despite some modest recent weakness in total buyers on Fiverr, spending per buyer has continued to rise.
Best of all, Fiverr’s take rate is the best among freelance marketplaces. Take rate describes the percentage of every deal negotiated on its platform, including fees, that it gets to keep. While most of Fiverr’s peers have take rates in the mid-to-high teens, Fiverr’s take rate rose to 32.3% in Q1. This means it’s able to collect significantly more than its competitors, but it’s not alienating the enterprise (buyers and freelancers) that keeps its business going.
Doubling my stake in Fiverr during a major correction would increase its weight in my portfolio to about 3%. That seems more than reasonable for a promising company with a long-term growth trajectory and a value of just nine times next year’s earnings.
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Sean Williams The Motley Fool has positions in Fiverr International, Mastercard, and Visa. The Motley Fool has positions in and recommends Fiverr International, Mastercard, Nvidia, and Visa. The Motley Fool recommends the following options: Long $370 January 2025 Calls on Mastercard and Short $380 January 2025 Calls on Mastercard. The Motley Fool has Disclosure Policy.
3 Stocks I Plan to Double My Investment In If The Stock Market Goes Down Originally posted by The Motley Fool
