Investors are feeling nervous and a 2020 market crash is now more likely than ever. Why? Fear of the economic fallout from the coronavirus has reached the US stock market. The Dow Jones Industrial Average plummeted 838 points on Tuesday, following a 1,031-point loss the previous day.
It’s quite simple to get a sense of the shares that could ride out a bear market. All we have to do is look at profitable companies holding their value while their rivals fall.
In my opinion, defence stocks and pharmaceuticals are your best options. These two FTSE 100 shares would be my best buys if I thought a market crash was on the cards.
GlaxoSmithKline
GlaxoSmithKline (LSE:GSK) has been a staple of my portfolio for many years. It’s not super exciting, but it’s also not a crazy bubble.
GSK is a market leader in retroviral and respiratory drug treatments. The market for these products has been steadily growing in the last 15 to 20 years.
The British pharmaceuticals giant owns 914 patents across 57 countries. It has 134 trademarked drug names. Because of this, it can sell products to large international markets that no-one else is able to. This gives it a wide economic moat.
What would Warren Buffett do?
The investing world’s favourite billionaire explained this concept in an annual meeting of Berkshire Hathaway shareholders.
“We think in terms of that moat and its impossibility of being crossed as the primary criterion of a great business,” he said. “If the moat is widened every year, the business will do well.“
GSK shares also support a rock-solid 5% dividend yield. It backs up that dividend with ever-growing earnings. And in the last 10 years, GlaxoSmithKline has made some of the highest dividend payments on the FTSE 100.
BAE Systems
Investors have reacted with delight to three high-tech acquisitions BAE (LSE:BA) has made recently. It swooped for UK firm Prismatic in September 2019, a company that makes solar-powered drones that can stay in flight for up to a year. This was BAE’s first takeover in more than two years. It suggests to me that the British defence and aerospace contractor will wait until real value presents itself before acting.
The second pair of acquisitions in January 2020 were a $1.93bn cash deal for Collins Aerospace’s GPS division and a $275m buyout of Raytheon’s Airborn Tactical Radios unit. The first deal adds a highly-regarded military positioning and mobile communications satellite firm to BAE’s stable. The second expands its market share of military electronic systems.
What the numbers say
Both these deals represent strong long-term value for BAE. I’m not too concerned about a £1.9bn pension shortfall. It is certainly nowhere near the scale of BT’s pension crisis, for example. And BAE has told the market it will pay off more than half of that shortfall in a one-off debt-funded payment.
BAE can afford to take on debt because its sales, margins and profits are all rising strongly. In 2019 full-year results, annual sales jumped 10% to £20.1bn while operating profits lifted 18% to just shy of £1.9bn.
The US acquisitions mean 2021 will see the same kind of single-digit earnings growth as in 2020, chief executive Jerry DeMuro said.
At current count, the shares also come with a relatively cheap price tag of 14 times earnings.
