The stock market has been moving around lately in a way that unnerves many investors. That may present a buying opportunity for my portfolio, depending on how cheap some shares get. I’ve been looking back to the last major stock market crash, in March 2020. There are shares I missed out on then which could have given me brilliant returns had I bought them.
The point of reflecting on the last crash isn’t just in case those shares go on sale again soon. It’s to see whether there were any analytical errors I made last time around from which I could learn when the market next sinks.
Legal & General
Last March I could have picked up Legal & General (LSE: LGEN) shares for 157p each. As of today, I’d be looking at an 80% share price appreciation. On top of that, I would have benefitted from the company’s dividend. Last year, it totalled 17.6p. So, if I had bought at the market low, I could have got a prospective yield of 12% for a well-respected FTSE 100 name.
Interestingly, the same thing had happened in the 2008 financial crisis. Back then, the Legal & General share price fell to 31p. After that crash, the dividend was cut for several times. This time around, it wasn’t cut but it was sustained at the same level for a year after a long run of annual increases.
Why did Legal & General fall so far? Looking back, I think the market was mispricing the risk in its business. A lot of the company’s business is in financial services such as home insurance and investment management. In the short term they could certainly have suffered from falling consumer confidence and the possibility of a deep recession. That will be true in the next economic crash too. But with the benefit of hindsight, I think many investors like myself underestimated the resilience of demand in the company’s key markets. Most people are going to insure their homes and cars no matter what happens in the wider world. In many cases, they are legally obliged to do so. Legal & General is on my list of shares to buy for my portfolio if its price crashes again.
Another share that collapsed last March was Howdens Joinery (LSE: HWDN). The shares traded around £4.41. Now they change hands at almost twice that level, at around £8.78.
I think the reasons for me being cautious here, looking back, may have been stronger than for Legal & General. Concerns about economic problems could easily have led into lower medium-term demand for the building materials the company sells. Meanwhile, as for many businesses, lockdowns meant an immediate curtailment of a key sales channel while many costs still needed to be met. So there was reason to be cautious about how well the business would perform not only last year but in the following period.
But I do think I missed a couple of key points on this share. First, looking back it seems obvious that in lockdown and with home working, many people would seek to change their living environments. So, even if the housing market wobbled, there would likely be a surge in demand for building materials. Could I have guessed that going into the first lockdown? I didn’t — but I think if I had thought through the longer-term implications of how people might behave in lockdown, that could have been one possible conclusion. More scenario planning on my part as an investor could have paid results here.
I also think I didn’t credit Howdens for the strength of its business before the pandemic. Over many years it had been building a loyal customer base with a combination of account management, focused professional marketing events, and customer service. That was one of the reasons it had posted strong results and had an improving share price in the years leading up to the pandemic. While the pandemic threw a spanner in the works, the share price fall now seems overdone given the underlying strength of the Howdens business.
Just like my mistake with Howdens, I missed a trick when it came to thinking through how people would behave in lockdown.
Looking back now, it seems straightforward. If people are not going out, do they still shop? Yes. How will they buy things from home? Online shopping. What does online shopping need? Software, payment infrastructure, and logistics support. Logistics support includes shipping and warehousing — both of which were already in high demand at the start of last year because of uncertainties about the commercial impact of Brexit.
With its warehouse network focussed on electronic commerce development, Clipper Logistics (LSE: CLG) looks like an obvious pickin hindsight. If I had scooped it up in last March’s stock market crash, I would have been sitting on a phenomenal 491% return in late September. Even now, after a pullback, my return would still be 346%. Again, my lack of detailed scenario planning cost me a great opportunity.
What about the next stock market crash?
Just because companies performed well during the last market downturn, that doesn’t mean they will do so next time – or ever again. I do think Legal & General and Howdens Joinery are attractive businesses and would be happy to add them to my portfolio at the right price. After its price increase, Clipper looks expensive to me, but at the right price, I would also be willing to add it to my portfolio. All carry risks, though, even if they seem mispriced looking back to last March. Falling customer demand could hurt revenues and profits at all three companies. The next crash might not be accompanied by the same economic drivers as the last one.
But the main point isn’t about specific shares so much as my decision-making process in choosing them. If I had spent more time before last year’s crash just thinking through some scenarios of how people might behave and what that could mean for specific sectors, I think I could have spotted some business areas which were likely to boom. Within them, I could then have chosen specific companies which might be poised to do well. That’s the research approach I am taking right now in selecting shares to buy for my portfolio in the event of another stock market crash.