When the market crashes, bargains become plentiful. For the astute investor, life-changing money can be made when everyone is panicking and selling. As Warren Buffett tells us, we should be greedy when others are fearful.
At no time was this more true than during the 2008 Financial Crisis. When the banking sector was on its knees, and prevailing opinion was that the entire financial system was going to collapse, fortunes were made by smart investors picking out quality stocks that had huge discounts and were priced to go bust.
It’s been over 11 years since the last crash. We had a brief recession five years ago, with fears of China growth slowing, which led to oil and commodities prices slumping, but since then it’s been all sunshine and rainbows, aside from a few blips.
But what should you buy when the stock market really crashes? Well, strong balance sheets are important, with good quality assets that are able to deliver sustainable cash inflows for a company.
A moat helps too — something that protects the company from competitors. If you had £1m today to start a company today, what damage could you do to Coca-Cola? The answer is very little. The moat there is too strong.
So, while very few people tend to think about a recession until it comes, this stock below is the one I’ll be loading up on when the crash eventually arrives.
A tribute to Southwest Airlines
Southwest Airlines under Herb Kelleher was a business with a relentless focus on low-cost operations. This meant it could pass on the savings to customers and generate the volume required for economies of scale.
Ryanair (LSE: RYA) is no different today. And though the airline is either loved or hated, everyone can agree on one thing, its pricing is extraordinarily cheap.
Yes, you might have to pay extra to choose your seat, for luggage, and even hand luggage now, but when you do, no doubt it is still cheaper than the nearest competitor. Ryanair isn’t trying to be pretty and the blue and yellow livery smacks of ‘cheap’. But this is done on purpose so that customers do not think money is wasted on aesthetics. And what it does do is drive down costs however it can.
And it certainly has a moat. This is a company that charges less per seat than many of its competitors’ operating costs! Clearly, trying to play against Ryanair in the low-cost arena is going to be tough unless that competitor is ready to go all in for a long and fierce pricing war.
Why I’d buy this stock in a recession
My opinion is that people will still want to fly in a recession. But when money is tight — price becomes more important. Therefore, Ryanair may even win customers as discretionary spending comes down and other priorities such as comfort and ease are left by the wayside. Other competitors will become unaffordable.
It’s also a stock that doesn’t look like going out of business any time soon. Traffic grew 11%, it said in its interim report. The company also announced operations in its 40th country — meaning there are well over 100 countries left in which it could potentially debut.
I’ll be waiting until everyone is fearful. Then I’ll be greedy.
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Michael Taylor 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.
Motley Fool UK 2020