There is a very real possibility of a second stock market crash in 2020. Risks such as the upcoming US election, Brexit and, of course, coronavirus could cause investor sentiment to weaken.
However, a decline in stock prices could present buying opportunities. Through buying high-quality stocks when they trade at discounted prices, it is possible for long-term investors to generate high returns as the economic outlook improves over the coming years.
A second stock market crash is likely to be caused by uncertainties surrounding the economy’s future prospects. This could mean that the operating conditions for many businesses come under pressure.
Therefore, it could be logical for investors to purchase companies with strong balance sheets and access to sufficient liquidity to survive a period of weak sales. They may be better placed to not only still be in existence in a few years’ time, but could also benefit from the demise of their weaker sector peers through increasing their market share.
Identifying the strongest businesses in a sector is subjective. However, measures such as debt levels, the amount of cash a company has on its balance sheet and its ability to access multiple forms of capital should it be required may help you to unearth the best stocks to buy should there be a further market crash.
Undervalued stocks in a market crash
A market crash can provide an opportunity to buy shares when they trade at low prices. However, this does not mean that investors should simply buy the cheapest shares they can find. Many stocks could be cheap because they face difficult outlooks, and they may fail to ultimately recover from their low price levels.
As such, it may be prudent to instead focus your capital on those shares that trade at a discount to their intrinsic value. This could mean that they are not among the cheapest shares around, but that they offer the best value for money based on their quality. It may be more profitable to buy more expensive companies with better prospects, than cheap stocks with difficult outlooks.
A long-term strategy
It is difficult to ascertain when a market crash will end and give way to a sustained bull market. Therefore, while it can offer buying opportunities, there is a chance of paper losses being sustained in the short run while a stock market fall is taking place.
This means that investors should adopt a long-term strategy when buying shares in a downturn. History shows that the stock market has always bounced back to post higher highs after even its most severe declines. The same outcome is very likely after this year’s challenges, which could make it a good time to start building a diverse portfolio of undervalued, high-quality businesses.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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