Stock Market Crash 2020: 3 Top Stocks To Buy

Summary

  • Top stocks: United Airlines (and airline stocks in general), Carnival, and Booking
  • Higher risk investors can do their due diligence to see if the stocks are suitable investments for them
  • Carnival pays a dividend but it can cut the dividend if things get really bad

I made this video, and I hope it gives a broader perspective on the investment landscape on top of the usual dividend ideas I give.

In late January, in my video “Will the Stock Market Crash in 2020?”, I essentially said that any negative impact on the economy can “drag the market down to its normal valuation of about 17 times earnings or even lower.”

It’s actually happening.

Stock Market Crash 2020?!

The 2020 stock market crash came fast and furious! In about a week, the U.S. stock market has corrected 12%, while the Canadian stock market has fallen 9%.

Source: Ycharts with author annotation

Actually, I wouldn’t call this a stock market crash, yet. To me, a market crash is when the market falls 30-50%.

I know it’s scary to think that you can lose half of the value of your stock portfolio, but this has happened before and can happen again.

I’d visualize my stocks being cut in half periodically so that I won’t panic when it happens.

It’s a Normal Market Correction So Far

From time to time, it’s normal for stocks to correct 5-15% for whatever reason that may appear in news headlines.

Frankly, I welcome the decline as it was getting harder and harder to deploy money into the stock market. In case you haven’t noticed, the S&P 500, which is a proxy for the U.S. stock market, delivered total returns of 31.5% in 2019, which was more than 3 times its long-term average returns of 10%.

So, it’s only natural that the market is giving some of the gains back in a correction.

Many companies expect lower or negative earnings growth

Some companies, including Starbucks (NASDAQ:SBUX) and Walt Disney (NYSE:DIS), warned that their near-term earnings would be negatively impacted.

Starbucks shut down more than half of its nearly 4,300 outlets in China for about a month before resuming the operations for most of the shut down stores. Even with the stores reopened, the traffic would probably be lower than normal in the short term.

In February, Disney disclosed that it expected to earn $175 million less in operating income in fiscal Q2 due to the closures of the parks in Shanghai and Hong Kong. Now it’s going to earn even less as it’s closing the Tokyo location for two weeks.

Both Starbucks and Disney are quality stocks that are trading at better valuations now. If you’re a long-term investor, you might look into buying these companies on dips strategically.

Because we don’t know how severe the market correction would be, it’d be prudent to average into positions over the next six months.

If you believe the market correction will come to pass like I do, say, a year or 3 from now, you might consider the following stocks to potentially as much as triple your money.

3 Top Stocks to Buy

Here are 3 top stocks related to travelling that have been hit hard in the current market correction. Investors who think they can withstand the volatility can consider averaging into them for market-beating returns.

Top Stock #3: United Airlines

AAL Chart
Data by YCharts

Believe it or not, when bought and sold at the right times, airline stocks have delivered some of the best returns in stock market history.

For example, since 2010, United Airlines (NASDAQ:UAL) stock has been almost a 5-bagger, returning more than 16% per year, despite the 30% price decline year to date. Needless to say, I think now is a good time to start building positions in airline stocks like UAL and expect to stay invested for 3-5 years.

Cowen is an American multinational independent investment bank. An analyst there, Helane Becker, determined that among the American airlines, United Airlines has the greatest exposure to China and the Asia-Pacific region in general.

China is the 2nd-largest economy in the world. So, it’s a good strategy for United Airlines to be more exposed to China. When the economic conditions normalize, UAL will experience greater growth — from valuation expansion and earnings growth.

Based on this scenario, at about $61 right now, the stock trades at a P/E of close to 5.1 and can potentially triple in 5 years (or deliver returns of more than 25% per year).

Top Stock #2: Carnival

Carnival (NYSE:CCL, LSE:CCL) is the largest global cruise company with an efficient scale and a portfolio of brands, including Carnival Cruise Line, Holland America, Princess Cruises, and Seabourn in the U.S., AIDA Cruises in Germany, Costa Cruises in Europe, and P&O Cruises in the U.K. and Australia.

In 2019, Carnival generated revenue of $20.8 billion (up 10% year over year) and adjusted net income of $3 billion (essentially flat against 2018).

It is a cyclical stock, and it’s trading at a cyclical low due to expected lower demand in the short term. The stock has crashed 34% year to date. At about $33 per share, Carnival stock trades at roughly 7.6 times earnings.

Like the airline stocks, when the economic conditions normalize, Carnival will experience tremendous price appreciation — from valuation expansion and earnings growth.

In 5 years, Carnival stock can potentially triple (or deliver total returns of nearly 25% per year), assuming no dividends.

Top Stock #1: Booking Holdings

Booking Holdings (NASDAQ:BKNG) is the #1 top stock because its profitability has little cyclicality and therefore, it’s a lower risk investment than UAL and Carnival.

Booking is a highly profitable company that generated revenue of $15 billion in 2019, up 4% year over year (or up 7% on a constant currency basis). The adjusted net income was $4.5 billion, while the adjusted EPS was almost $103, up 11% against 2018. It generated adjusted EBITDA of $5.9 billion, which was up 2% year over year. Additionally, Booking generated free cash flow of $4.5 billion in 2019.

Booking provides online travel and related services in more than 230 countries and territories. It has made strategic acquisitions to build a wide moat around its business. And in the process, it has made its investors super rich.

If you invested the stock at the start of 2007, you’d be sitting on a 38-bagger! Essentially, the quality stock has delivered returns of 32% per year since then turning $10,000 into $388,831.

On your previous trips, you might have used its services such as Booking.com, Rentalcars.com, or OpenTable.

Booking expects a hit of 3-7% on its revenue in the first quarter of this year against Q1 2019. Analysts are estimating EPS growth to be flat in 2020.

As a result, the stock has corrected about 17% year to date. At about $1,700 per share, Booking stock trades at about 16.5 times earnings, which is a decent valuation to pay for its long-term EPS growth of 10-11% per year.

Valuation expansion over the next 3-5 years can help boost total returns to 15-18% per year.

Conclusion

The current market correction is normal given the substantial 31.5% gain the U.S. stock market experienced in 2019.

Time will tell if this market correction will turn into a market crash. However, if you have an investment horizon of at least 3 years but ideally at least 5 years, you should research United Airlines, Carnival, and Booking to see if they fit your stock portfolio, as I believe they can deliver incredible returns over the next 3-5 years.

However, if they’re not for you, you can consider quality dividend stocks, such as Starbucks and Disney on the dip. They are less of a direct hit from viruses.

Resources & References

  • Various Pixabay artists, F.A.S.T. Charts, YCharts

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Disclosure: As of writing, we own shares of BKNG, CCL, and DIS.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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