How to Profit From This Pandemic Correction

With painful memories of the March crash still fresh in all our minds, the prospects for a sharp decline in the market is something that understandably has many investors worried. Fortunately, there are three ways you can not just avoid costly losses in these troubled and uncertain times but actually profit from what's likely to be a great 2021 for the S&P 500 and a face-ripping rally for certain undervalued, pandemic effected blue-chips.

(Source: Imgflip)

Morgan Stanley's pandemic correction prediction might sound scary. After all, if they are right then stocks will end up falling 12% from record highs.

(Source: Guggenheim Partners, Ned Davis Research)

But guess what? Of the almost three dozen corrections we've had since 1945 the average peak decline has been 14%, and it took four months for stocks to bottom at those levels. Historically, within four months of correction lows, stocks are back to record highs.

Since 1980 the average peak intra-year decline has been 13.8%, basically the historical correction average. That includes back in 1987 when the S&P 500 fell 20% in a single day, 30% within a few weeks, and still managed to finish up 2% that year.

(Source: Michael Batnick)

Since 2009 we've had dozens of market freakouts, all based on headlines that investors assumed meant that they needed to "do something!". Guess what?

As long as the US economy doesn't implode owning stocks is as close to a guaranteed way of compounding income and wealth as you'll find in this world.

While it's always prudent to listen to the most reputable experts, it's also important to remember that Wall Street only speaks three languages, none of which are absolute certainty. The three languages of Wall Street are

1. Probability
2. Margin of safety
3. Risk management

Could the second wave of the pandemic trigger a double-dip recession? Absolutely. Is it likely to?

(Source: Jeff Miller)

According to a recent survey of US CEOs, just 23% consider a double-dip recession likely. Among economists? The risks of a second economic downturn are estimated at 20% to 25% as well.

(Source: MarketWatch)

Among the 16 most accurate economists out of 45 tracked by MarketWatch, the blue-chip consensus, neither Q4 2020, Q1 2021, or 2021 overall, is expected to see negative economic growth. In fact, next year the most accurate economists on earth expect the strongest economic growth in 20 years. That's expected to result from $1 to $2 trillion in stimulus, which may rise as high as $3 trillion according to Moody's depending on the outcome of the election.

In part one of this series, I quoted Mike Wilson, Chief US Equities Strategies at Morgan Stanley. Readers might have missed the end of that quote, in which Mr. Wilson recommends

In other words, since the pandemic is NOT going to last forever, and since 2021 is likely to see a strong economic recovery driven by trillions in stimulus spending and a vaccine, any significant market declines can make for wonderful bargain hunting opportunities.

(Source: AZ quotes)

What's a potentially great bargain hunting opportunity in the throws of this pandemic correction? Well, let's turn to FactSet Research to see what sectors are most likely to benefit from the very sunny spring that's likely to follow this dark pandemic ravaged winter.

Industrials are expected to see the strongest growth next year, almost 90% EPS growth following a horrific 51% earnings decline this year. Better yet, there are world-class industrials that are directly impacted by this pandemic, and thus are most likely to recover strongly from the vaccine that the CDC expects to be available to every American who wants one by mid-2021.

(Source: F.A.S.T Graphs, FactSet Research)

Raytheon Technologies is a 10/11 quality SWAN dividend aristocrat with a 27-year dividend growth streak that analysts expect to grow its dividend 4% in 2021 and 8% in 2022.

(Source: F.A.S.T Graphs, FactSet Research)

But that dividend growth is the least impressive of the mammoth growth analysts expect from RTX next year.

• EPS growth consensus 29% in 2021
• 28% growth consensus in 2022
• 25% growth consensus in 2025

(Source: F.A.S.T Graphs, FactSet Research)

If the 19 analysts who cover RTX are correct, and it grows as expected through 2023 and returns to the historical fair value of 16.5X earnings, then 18% CAGR total returns are possible.

(Source: F.A.S.T Graphs, FactSet Research)

Analysts expect RTX to potentially generate 16.5% CAGR total returns, vs just 4.1% CAGR from the S&P 500, all the way through 2025, from these extremely attractive valuations. Think those analyst consensus return potential estimates are outlandish?

(Source: Portfolio Visualizer)

Over the past 34 years, a period when 91% of total returns were a result of fundamentals, not luck, RTX delivered average 15-year returns of 14.4%, almost double that of the S&P 500. From bear market lows, it was able to generate as much as 35% CAGR total returns over five years and 21% CAGR total returns over 15 year periods. The point is that when you buy a truly exceptionally high-quality and fast-growing blue-chip, then you can earn long-term returns on par with the greatest investors in history. Not by finding the next Tesla, Snowflake, or buying into the latest speculative non-profitable tech IPO, but by merely profiting from an undervalued fast-growing dividend aristocrat during this pandemic correction.

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