When the market nosedives into a crash, savvy investors know it's an opportune time to buy quality stocks at discounted prices.
The same tenets apply no matter what caused the crash. Markets are irrational and will overshoot to the downside in times of fear.
But high-quality businesses will continue to operate regardless of the market's psychotic volatility. What's more, they possess highly attractive economic characteristics, no matter what industry.
What's good for diamonds is good for diapers, as they say.
One ASX 200 stock that stands out to me in this fashion is Macquarie Group Ltd (ASX: MQG). The business is a little expensive right now, trading at more than 25 times earnings.
But in the event of a market downturn, I'd be ready to pounce. Here's why I'd be eager to add it to my portfolio if the market takes a dip.
Buying businesses in a stock market crash
It's important to first define a 'market crash'. According to brokerage platform CMC Markets, a stock market crash is "a drop of at least 10% on a stock exchange or major stock index within a single trading day."
What's important is that an entire index must drop to be called a crash (not a single stock), and the drop must be more than 10%.
So if the stock market rises by, say, 20% in a year and then falls by two percentage points one day as the NASDAQ-100 Index (NASDAQ: NDX) did in September, this isn't a crash. By the way, if you're worried by this, "you're not geared for stocks", FundStrat's Tom Lee says.
Alas, when the stock market experiences turbulence, it's crucial to focus on companies with strong fundamentals and a proven track record of weathering economic storms.
Macquarie fits this bill, in my opinion. It is Australia's leading investment bank, with a highly diversified business that is present in several markets.
These range from capital markets and commercial banking to infrastructure and commodities.
In its half-year results, Macquarie reported a net profit of $1.6 billion, up 14% from the prior corresponding period.
It also increased its assets under management by 3% and now has nearly $917 billion of client money at work.
Recession-resilient earnings
One of the benefits of a diversified set of earnings is that in times of market or economic trouble, Macquarie can still make money during a stock market crash.
The company has several annuity-style segments, including Macquarie Asset Management (MAM) and Banking and Financial Services (BFS).
Much of this fixed-style income is passed through to investors as dividends.
In its latest numbers, the company declared a partially franked interim dividend of $2.60 per share, a 2% increase from the previous year's interim payout.
This represented a payout ratio of 61% of net profit, comfortably within the bank's target range of 50% to 70%.
But the whole suite of operating lines provides good cover in all kinds of markets.
For instance, during the past few years, when interest rates and inflation have been high, reducing Macquarie's capital markets and sales and trading revenues, it has booked strong growth in its commodities division.
If there were a stock market crash, this diversification would provide an economic bastion to weather the storm and see the bank still grow earnings.
And if there were no avenues to redeploy the funds back into the business, management could return capital to shareholders via dividends and buybacks. That's a huge advantage.
Morgan Stanley isn't waiting for the market to tank to buy Macquarie shares. It rates the stock a buy, setting a price target of $248 in doing so.
Despite acknowledging that recent earnings fell short of expectations, the firm believes the market has yet to fully recognise Macquarie's multi-year earnings growth potential.
If correct, the share could trade about 8% higher from the time of writing. But if the stock market crashed by 10%, and Macquarie stock fell by 10% alongside the index, it would fall to $208 per share.
This would open the valuation gap to 19%, excluding any return from dividends.
Foolish takeout
A stock market crash isn't something any of us want. If not for the fact it might indicate something more sinister.
But there's been plenty of crashes in the past, and markets always find a way to recover. As such, there are always plenty of opportunities around that time.
Macquarie's valuation is too expensive for my preference right now, but there's no denying the underlying business' strength. If the market tanked, I'd be looking at buying Macquarie stock immediately.
The stock is up 40% in the past year.
