Predictions of a second stock market crash are all over the internet. The reasons range from another wave of Covid-19 infections to slow business activity and permanent low bond yields. But whatever the explanation, it’s best to be prepared, just in case.
In terms of stocks, this means turning a potential crisis into a buying opportunity, especially for top growth shares.
Growth stocks are often expensive
Under normal circumstances, one of the problems with buying shares with good prospects is they usually sell at correspondingly high prices. You may be right about their futures, but you can easily overpay for the expected gains.
In other words, the investment case for the company itself is sound, but the price is too high. This makes the purchase risky.
The ideal scenario is to purchase these same stocks when they’re selling at a much lower price-to-earnings (P/E) ratio, such as during a stock market crash. If and when the next crash happens, I’m hoping the following two shares will provide me with buying opportunities.
Codemasters Group Holdings
Codemasters (LSE: CDM) is a racing video game developer and publisher and is the company behind Formula 1. The video gaming industry has been one of the areas to thrive during the pandemic period. With many people stuck at home, gaming is in demand, and opportunities for gaming companies abound. Any lockdown resulting from a second wave of infections may produce the same.
But Codemasters is more than just a reactive investment opportunity. Over the last five years, its revenues have increased by 145%, its operating profit by 436%, and earnings per share (EPS) have soared from a negative 6.1p in 2016 to 8.9p in 2020. It’s certainly a profitable revenue generator, unusual for a technology company.
In addition to these qualities, Codemasters records a current liquidity ratio of 1.89, indicating the firm can easily meet its short-term financial obligations. A debt-to-equity ratio of 0.54 also shows the company is potentially solvent in the longer term too.
However, the market has all these qualities priced-in. Codemasters currently trades on a P/E of 41.6, far too high for my liking. But if a second stock market crash were to happen, I’d be eagerly waiting for this to drop under the industry P/E average of 27.
Team17 (LSE: TM17) is another video gaming growth stock, known for its classic Worms game. Like its AIM-listed peer above, it has also benefited from recent market opportunities. However, it has recorded an even more impressive set of financials over the last five years.
Revenues have increased by 495%, operating profit is up 388% and EPS have risen from 2.4p in 2015 to 12.9p in 2019. Team17 boasts a current liquidity ratio of 4.52, meaning it has plenty of resources to finance its short-term commitments. It also has limited debt.
However, currently trading on a P/E of 42.5, the market already knows Team17 is a good investment case. A purchase now would be highly speculative, given its price. As with Codemasters, I’d prefer to wait for a P/E under 27.
Both these video gaming companies are great performers. However, I think they’re both currently expensive, and therefore risky purchases. A second stock market crash could change that and provide two great buying opportunities.
Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.