Investors will naturally be timid about putting money into a market with multiple banks failing, high-interest rates, and inflation concerns. However, amid a distressed market, it can be a good time to hedge your portfolio with stable companies well-suited to outlast a recession.
Here are two well-positioned stocks in the event of a market crash.
1. Berkshire Hathaway: Sitting on a pile of cash
In difficult times, investors can feel better following the lead of Warren Buffett and Charlie Munger, two of the most prolific and most experienced investors ever. The two helm the $660 billion holding company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B).
Buffett's strategy of buying distressed stocks and assets is one reason why the stock has generated a 19.8% compound annual gain since 1965. For comparison, the S&P 500 produced a 9.9% compound annual return during the same time period.
Over the past decades, Buffett and Munger have built a "war chest" of cash and cash equivalent reserves through its insurance business, which produces a "float," or premiums from its customers upfront. As of Dec. 31, 2022, Berkshire Hathaway held $125 billion in cash and short-term treasury bills at its disposal. Buffett has previously stated he will never let Berkshire's float fall below $30 billion, which still leaves $95 billion for him and Berkshire's investing managers to purchase discounted companies and stocks.
While past performance doesn't necessarily predict future results, if one company is prepared to take advantage of a recession, it's Berkshire Hathaway. Amid the Great Recession, Buffett wrote in his annual letter, "We enjoy such price declines if we have funds available to increase our positions... Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
2. Waste Management: Taking out the trash in good times and bad
Most homeowners and renters know Waste Management(NYSE: WM), the leading provider of comprehensive waste management services in Canada and the United States. Its stock has been stagnant over the past 12 months but has produced a total return of 97% over the past five years. For comparison, the S&P 500 has produced a total return of -9% and 60%, respectively.
For better or worse, humans, and Americans in particular, produce a lot of waste. In 2022, Waste Management received roughly 452,000 tons of solid waste daily, equating to nearly 165 million tons per year across its 259 landfills. That's up from 413,000 tons of solid waste each day in 2020 across 268 landfills.
Looking at Waste Management's financials, the company is free-cash-flow positive, meaning it won't need to take on additional debt if management needs to become more conservative with its capital allocation and pay down its relatively high $14.5 billion long-term debt. Specifically, management guided for $2.6 to $2.7 in free cash flow for 2023, with roughly $1 billion going to sustainability and automation-focused capital investments.
Waste Management is also a dividend stock, paying a quarterly dividend of $0.70 per share, equating to a 1.8% dividend yield. 2023 marks the 20th consecutive year that Waste Management has paid and raised its dividend.
Are these two stocks a buy?
Navigating a recession can be difficult for the most seasoned investors. That's why keeping a watchlist of stocks that can survive or even thrive in a market crash can help your portfolio outperform over an extended period.
If the market takes a nosedive, Berkshire Hathaway's cash hoard allows it to invest or acquire companies at a depressed price, and Waste Management's business model should continue uninterrupted. That makes both stocks worthy for any investor seeking protection against a potential market crash.
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Collin Brantmeyer has positions in Berkshire Hathaway and SPDR S&P 500 ETF Trust. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Waste Management. The Motley Fool has a disclosure policy.