The stock market has had a strong year, giving many investors reasons for cheer. But doubts remain about the strength and sustainability of the economic recovery. Some analysts worry that if the market keeps growing faster than the economy, at some point there could be a stock market crash.
I’m not that worried, as I think such crashes are part and parcel of being an investor. In fact, if there is a correction I’d consider using it to pick up some shares for my portfolio. Here are two of them.
While the name Diageo (LSE: DGE) might not be familiar to many people, its products certainly are. The company is behind drinks from Baileys to Johnnie Walker.
There are several things I like about the business. Its portfolio of premium brands gives it pricing power. That allows it to raise prices, which should help it maintain profit margins even in the face of inflationary concerns.
I also like the fact that the company covers a wide range of drinking occasions. It has super premium products like Johnnie Walker Blue Label but also more everyday brands such as Guinness. It even has non-alcoholic beverages such as Seedlip, which could help mitigate the revenue risk of falling alcohol consumption among younger consumers. This broad spread of products to meet different budgets and tastes enables Diageo to appeal to a large customer base globally.
In fact one of the few things I don’t like about Diageo is its share price. Currently it trades on a price-to-earnings valuation of 34, which like some of the company’s products is a bit rich for my taste. If a stock market crash brings the Diageo share price down, I’d consider taking advantage to add it to my portfolio.
A very different sort of company is instrument maker Judges Scientific (LSE: JDG). It has a narrow customer base, focussing as it does on users of precision equipment such as research laboratories. Like Diageo, though, it has pricing power. Quality matters in such an environment, so customers are willing to pay for the premium products supplied by Judges.
The business model appeals to me too. Judges maintains a small corporate presence, which allocates capital and helps its subsidiaries optimise their performance. Other than that, it mostly leaves them to get on with things. It buys such companies at disciplined valuations. That means that it can turn a healthy profit without being burdened by heavy overheads.
That profitability has translated into double-digit dividend increases year after year. That isn’t guaranteed, though. Demand shocks due to travel restrictions limiting the company’s ability to install equipment could hurt profits, for example.
Companies like this are rare and Judges’ valuation reflects that. With a P/E ratio of 46, I won’t buy it right now for my portfolio. But if a stock market crash brings the Judges Scientific share price down, it’s on my shopping list.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Judges Scientific. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.