Earlier this week I read an article stating that the UK might already be in a recession. We’ll have to wait for the data to see if this turns out to be correct, but if so then the stock market could get spooked. In the event of a crash, I’d expect most stocks to fall, creating some opportunities to buy cheap shares. But which ones make sense to buy?
Figuring things out
It might sound a bit odd to be selective about the stocks worth buying if the market dumps. After all, a crash is usually classified as a fall of 20% or more. So assuming every stock falls by this amount, shouldn’t I just buy everything? No!
The reason for this is that some firms are struggling now, and a crash is only going to make matters worse. For example, take CAB Payment Holdings, a finance company in the FTSE 250. The stock has dropped 73% over the past three months due to a poor trading update. I think there are more problems ahead for the firm. So even if it dropped another 20% from a broader market crash, I still don’t want to buy it!
The kind of stocks I do want to add on my watchlist are shares that I like, but that I feel are currently a little bit overvalued. Or stocks that are simply fairly valued. In both cases, I’m not really gaining much in buying at this moment. But if the share price dips in the future, I’d be keen to snap it up.
Specific examples
A good example is Games Workshop. The stock is up 63% over the past year, and jumped 6% last month thanks to strong quarterly results that beat expectations.
Yet the price-to-earnings (P/E) ratio is now 26.24, well above the FTSE 250 average. With the extra jump following the results, I feel I’ve missed the boat to buy right now. I’d prefer to see the valuation reduce before I purchase.
Another case is JD Wetherspoon. The well-known pub chain has done very well over the past year as it continues to recover from the pandemic. The stock is up 48% over the past year, with a P/E ratio of 26.88.
I like the company and feel it could do well going forward, but don’t have enough of a reason to buy it currently. Yet if the stock suffered a sharp fall, I’d use this as an entry point to buy.
Not timing the market
A valid risk is that we might not have a market crash, in which case I might never get an opportunity to buy at lower levels. This is true, which is why I’m not putting all of my eggs in one basket. There are good value shares out there that I’m looking at buying right now. So even if a crash doesn’t happen, I’m not going to lose out!
