If the stock market crashes, I’m going to…

If the stock market crashes and shares suddenly become cheap, I’m not going to do anything. That might seem like I’m missing out on a huge opportunity, but I have a plan.

I’ll keep following my usual approach to buying, which is looking for undervalued shares when I have cash available. But most of the work for me will be going on behind the scenes.

Market timing

A stock market crash can be a great opportunity for investors who are prepared, but it can be devastating for those who aren’t. And being ready is more complicated than it looks. 

One strategy for getting ready involves holding back cash. The trouble, though, is that nobody knows when share prices are going to fall and holding on to cash is a bad long-term strategy.

That’s why I intend to be invested before the next crash – whenever that is – and stay invested through it. That might sound like I’m going to miss out, but I have a plan to avoid this. 

Put simply, I’m looking to own shares in companies that will be able to take advantage of a stock market crash on my behalf. And there are a few names in my portfolio that fit the bill.

Buybacks

One example is Bunzl (LSE:BNZL). The FTSE 100 distributor has committed to spending £700m a year until 2027 for either acquisitions or share buybacks. 

In this context, a stock market crash could be a very good thing for investors. Buybacks reduce the number of shares in circulation, boosting earnings per share in the process.

At today’s prices, £700m is enough to reduce the company’s outstanding share count by 10%, which is pretty significant. And this goes up the more the share price falls. 

That means Bunzl – and its shareholders – stand to benefit from lower share prices. The firm is buying its own stock, so it suits investors like me better for this to happen at lower prices.

Valuation

Bunzl is able to repurchase as much as 10% of its outstanding shares right now because the stock is cheap. And this is why it stands out to me over other companies doing buybacks.

This isn’t entirely random. As well as recent problems of its own making, there are genuine risks, such as the current weakness in US restaurant industry. 

Despite this, I think investors are underestimating the firm’s current strength and future prospects. And this makes it easier for me to hold on to it in a stock market crash.

With overvalued stocks, I find it hard to justify holding them when share prices start falling. But when prices are well-supported by fundamentals, I have something to fall back on.

Strategy

I want to be in a position to take advantage of low prices during a stock market crash. But I don’t want to be in a situation where I’m holding on to cash and waiting.

My way around the dilemma involves owning shares in companies that can take advantage on my behalf. That way, I can benefit from lower prices without having to be out of the market. 

The best bit is that these are the stocks I want to own anyway. I’m not just using Bunzl as a hedge against a crash – I think its growth prospects make it worth considering anyway.

The post If the stock market crashes, I’m going to… appeared first on The Motley Fool UK.

More reading

• My plan of attack for the next stock market crash
• Is there a ‘best’ time in the market cycle to start buying shares?
• Missed Rolls-Royce? Here are 3 out-of-favour growth stocks to consider right now
• 3 beaten-down UK stocks to consider buying before they recover (rather than after)
• What’s worse than a stock market crash?

Stephen Wright has positions in Bunzl Plc. The Motley Fool UK has recommended Bunzl Plc. 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.

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