In 35 years as a veteran value investor, I’ve witnessed (and survived) four stock-market crashes. These happened in October 1987 (Black Monday), 2000/03 (the dotcom bust), 2007/09 (the global financial crisis/GFC), and spring 2020 (Covid-19’s ‘Meltdown Monday’). The first and fourth of these market crashes were sharp and steep, but fairly short-lived. Unfortunately, the dotcom bust and GFC went on for years, crushing share prices as markets relentlessly headed southwards. During these two drawn-out collapses, I learnt to choose shares carefully for survival. Here are two cheap stocks I’d buy today to ride out the next market meltdown.
Cheap stocks: #1. British American Tobacco
The first of my cheap stocks to weather the next stock market crash is British American Tobacco (LSE: BATS). As the name suggests, BAT is a major manufacturer of tobacco and cigarettes, plus vaping products. Smoking is a deadly habit and tobacco consumption is falling in the developed world. However, due to growth in developing nations, cigarette sales are actually up this year. In this age of ESG (environmental, social and governance) investing, BAT shares are a no-no for some investors. But I see this unloved and unwanted stock as undervalued, because BAT generates massive revenues, profits, earnings per share, and cash dividends.
Why is BAT one of my cheap stocks? First, it has a 119-year pedigree, having been around since 1902. Second, it trades on a lowly rating of 9.9 times earnings and an earnings yield of 10.1%. Third, BAT shares offer a market-beating dividend yield of 8.1% a year. That’s more than double the FTSE 100‘s 2021 forecast dividend yield of 3.8%. Fourth, at Thursday’s closing price of 2,663.5p, BAT is a £61.1bn heavyweight. Fifth, the shares trade almost £3 below their 52-week high of 2,961.5p (that’s a 10% discount from their peak). I expect these fundamentals to cushion BAT from the worst of the next market meltdown. But BAT carries £40.5bn of debt on its balance sheet, making the shares riskier than they appear at first glance.
Crash survivor #2: GSK
The second of my cheap stocks to ride out the next downturn is GlaxoSmithKline (LSE: GSK). I must declare an interest: I own GSK shares and have done for most of the past three decades. Also, from the late 1980s until earlier this year, my wife worked for the pharma giant before leaving for pastures new. In recent years, the GSK share price has been a rough ride. At their 2020/21 peak, the shares hit a high of 1,846p on 17 January 2020. However, since the Covid-19 meltdown, the stock has failed to return to former heights. The shares are down 7.4% over the past month, up 9.% over six months, 4.6% ahead in 2021, and have lost 7.7% over the past year.
Recently, I briefly considered selling my GSK holding when the price hit 1,525p in late August. However, I held off. On Thursday, GSK closed at 1,403.8p, down 8.4% from the 2021 high of 1,533p. This leaves the £70.6bn company’s shares trading on a reasonable multiple of 16.1 times earnings and an earnings yield of 6.2%. Their attraction for me is the improved dividend yield of 5.7% (almost two percentage points above the wider FTSE 100). For me, the main risk emerges in 2022, when GSK will break up into two separate companies. Also, the dividend will be cut to 55p next year. However, despite these risks, I’d keep buying GSK at current price levels.
[fool_stock_chart ticker=LSE:GSK]
