A lot of the time, shares in the best companies trade at prices that reflect the quality of the underlying businesses. But a stock market crash can change all of that.
Buying stocks at unusually cheap prices can provide great returns for decades. So it’s worth investors having an idea of what stocks they might want to buy.
Experian
Top of my list is Experian (LSE:EXPN). The stock has comfortably outperformed the FTSE 100 over the last five years and it’s easy to see why – this is an exceptional business.
The company provides credit reports to help lenders evaluate potential borrowers. While it might be subject to cyclical ups and downs, I think demand in this industry is going to grow over time.
Competition is limited. Equifax and TransUnion offer similar products, but banks typically view these as complementary, rather than competitive and I expect this to continue in future.
I also think the chance of new competition is very low. Experian’s reports are built using data drawn from various sources that would be virtually impossible for a new entrant to replicate.
The company’s data is a huge asset. But it also brings risk – the possibility of a data breach can’t be entirely ruled out and the size of such a threat is massive.
I think the long-term outlook for Experian is very positive, but the price of the stock currently reflects this. If a stock market crash were to send shares lower though, I’d expect to be on this one in a hurry.
InterContinental Hotels Group
InterContinental Hotels Group (LSE:IHG) also has a strong competitive position. On top of this, it has some extremely attractive unit economics that investors should pay attention to.
Operating a franchise business means InterContinental doesn’t incur most of the costs of running a hotel. Instead, it takes a percentage of revenues in exchange for being part of its network.
Barriers to entry in the industry are relatively low. Setting up an independent hotel is fairly straightforward and that means the competitive landscape can be tough.
Importantly though, it doesn’t cost InterContinental much to add hotels to its network. And after joining, there’s a significant cost for operators involved in switching to a different franchise.
The company is a rare example of a business that can grow while returning almost all the cash it generates to shareholders as dividends. At the right price, I’d be very keen to buy it.
After a 60% gain over the last five years, the stock trades at a price-to-earnings (P/E) ratio of around 27. At that level, I’m looking elsewhere, but that will change if the price drops suddenly.
Buying shares
In general, I think waiting for share prices to fall before buying is risky. The stock market will almost certainly crash again, but it might not happen for a while and the cost of waiting might be too high.
Instead, my approach is to take advantage of the best opportunities I can find at any given time. A lot of the time, that won’t be in the companies that everyone knows have outstanding businesses.
When prices fall sharply, though, there can be unusually good opportunities for investors. And in that situation, I’ll be looking at Experian and InterContinental Hotels.
This post was originally published on Motley Fool
