When I started investing, I used to dread the prospect of a stock market crash. Today, I welcome their periodic arrivals as a chance to pick up my favourite stocks at reduced prices.
I can’t say for sure when the stock market is going to crash next. Nobody can. On most occasions, they come out of the blue.
But I like to prepare well in advance, by drawing up a hit list of top stocks to snap up if the index falls along with the rest of the market. I target stocks I would love to buy today but are just that little bit too expensive. FTSE 100 consumer goods giant Unilever (LSE: ULVR) definitely falls into that category.
On my watchlist now
Unilever trades at a price/earnings ratio of 19.1 times earnings, well above the FTSE 100 average off around 10.5 times. Perhaps I’m being greedy in expecting a lower entry price for this in-demand stock. Unilever has routinely traded at 24 times earnings.
Another advantage of buying when markets are down is that I’ll generate a higher level of income. The current yield is 3.5%, bang in line with the FTSE 100. That’s actually pretty good for Unilever, so perhaps I’m pushing my luck.
I actually expected the Unilever share price to be more expensive and have an even lower yield, given that it’s climbed 23.74% over 12 months. Over the same period, the FTSE 100 has edged up a much less impressive 3.47%.
Five-year performance is weaker with Unilever rising just 4.16%, as it missed the post-Covid rally. Falling earnings per share, a flop £50bn bid for GSK’s consumer division, and the derision of activist investors who have been demanding a root-and-branch shake up of the company’s structure all took their toll.
I might have to buy it anyway
As is so often the case, investors who bought at the moment of maximum disappointment have reaped rewards. I’m less tempted to buy at the end of a decent rally, like the one Unilever has seen.
Yet I still want this company in my portfolio. What I need now is a good across-the-board stock market crash as an excuse to dive in.
But as I hinted before, I’m being a bit demanding. Unilever appears to have learned lessons and posted a strong start to this year, with Q1 underlying sales up 10.5%. The dividend has been held steady while it will complete the third tranche of its €750m share buyback this month. The forecast yield is 4.7%, but with earnings cover of only 1.5 future progress may be slower.
Activist investors have gone quiet since Nelson Peltz joined the board last July, but it may still need an overhaul to realise its full value. Another concern is frequent price rises to counter inflation. So far, sales have held up but as management may have to push more costs onto its cash-strapped customers, this could hit sales.
Being honest, I can see Unilever is a buy at today’s valuation, so maybe I’m daft to wait. Instead of a crash, we might get a rally and then I’ll end up kicking myself.
I think I’ve just talked myself into buying it, regardless of what the wider market does. If markets crash afterwards, I’ll buy a bit more.
