The market crash is in full force in 2020, March has been a tough month and we could see further downside due to the Coronavirus (COVID-19). How can you survive a market crash and what are the best short term stocks after a recession? This is not investment advice and any market action you take is done at your own risk. This is simply an opinion based on some of the data we’ve collected. Investing in stocks for the short term is done with the objective of gaining a significant return in under a year.
Short Term Stock Trading
When we think short term stock trading, many trades or investors think hardcore day trading or swing trading speculation. However, the same principles apply to short term investing as they do long term investing. We’re looking for value and growth in a company to invest in. This process can be considered swing trading as we are holding the stock for a short period of time.
A holding period of a year or less qualifies short term stock trading or investing. In this process, the idea is not to hold the stock forever and cash out at the end of your life or on dividends. Rather the goal is to look for capital gain growth based on the undervalued stock. The best short term stocks to trade are those that have immense value but have not reached their potential. One reason can be due to a market crash which is the best reason you want to short term trade a stock. Other market conditions have probably priced in the stocks fair value.
That is why the stock is priced at what it is. That is as much as the market participants are willing to pay for it. In recent times, we have hit a market crash. Starting late February 2020 we saw the stock markets around the world dip heavily. Mainly those in the United States that reached and breached bear market territory. This turns into a great opportunity for those who are long term and short term investing.
The Current 2020 Recession
After the turn of the new decade market participants and investors alike were rejoicing at the great gains the market dished out in 2019. Over 30% gained in the US markets and it all looked like roses, the economy was healthy and strong and there was more upside to be seen. Bank analysts 2020 targets were hit in the first month of the year.
Then a global pandemic shook up the world starting in China. The Coronavirus spread throughout and started to force nations to shut down borders, close everything within and go into self-isolation with stricture self-quarantine rules. The virus was not taken seriously when in China and the global spread and mass death forced people to respect that gravity of the pandemic. Businesses were shut down, supply chains disrupted and a lot of companies faced bankruptcy. Which caused mass layoffs, unemployment numbers to increase and most of all massive Federal reserve intervention. The quantitative easing came in floods of trillions of dollars and interest rates were cut to zero.
Politicians and officials even tried to get investors and the public to buy equities to prop up the market. The Fed was even considering buying equities or announcing it. The market dropped nearly 40% at one point before asset management at the end of the first year quarter stalled the downside. Which left investors wondering which stocks would survive? What are earnings going to look like?
This also presented those with savings a great opportunity. Those who were cash-rich rejoiced at the opportunity and are in a favorable place right now to buy equities for the short term and the long term.
What to look for in short term stocks
When looking for the best short term stocks, especially after a recession there is one main thing to look for. Which companies are cash-rich? Those companies have the highest probability of surviving a recession and a global pandemic such as Coronavirus.
It’s simple, companies with cash on hand can afford to pay employees and continue their business as usual for the most part. Just like individuals who are strapped in the situation. Those with cash will be able to not only survive but take advantage of lowered asset prices for capital gain.
How can you identify which stocks are cash-rich? One way is looking at the free cash flow they have on hand. Which can be done through a stock screener like Finviz. Another way is to look for companies that will be around forever and who have been around forever holding their ground. The icing on the cake is if they’re cash-rich as well.
Take a look at the free cash flow study on Finviz.
The fundamental ratio that is circled in red is the price/free cash flow. It is generated by dividing the assets market cap by its free cash flow on hand. So that means the lower the number from the ratio the more cash flow the company has. If the free cash flow (denominator) is larger it makes the ratio smaller. Now some companies may not have a large market cap which makes it seem like their price/free cash flow is a good ratio. So you can mitigate that by only looking for companies that have large market caps. What is a good ratio to have? Ideally, one that is under 15 if not, under 25.
Some Stock Suggestions
Using the criteria above we can divide the companies into two categories. Large caps/Mega caps that are cash-rich or strong companies that are expected to be around for a long time. The first criterion is a little more technical than the second.
Based on the first criteria some heavy cash companies with large market capitalization are Apple and Microsoft.
Apple is a tech conglomerate that has a lot of money on the books and is continuing its technological advancements even through the pandemic with 5G networks. Shop in China is reopened and the company that has tens of billions in cash has the ability to survive the recent March 2020 market downturn and will rally well when the crash comes to an end. The caveat is pinpointing when the downside may be over. This can be estimated when deaths and cases of Coronavirus start to slow and eventually disappear. The Apple chart still looks healthy and could rally from the current price really well back to the $300 mark. Where you get in is up to you. We are watching what happens in news and market activity around the $220 level. From $220 to $300 is a $36% increase which could happen in a matter of months. Let alone a year.
Microsoft is a huge company with excellent innovation and progress that has been a tech leader and will continue to grow in the future. The company is not only established like Apple but also cash-rich. The company had about $38 billion in free cash flow in 2019. That number has been increasing by roughly $5-6 billion year over year. Free cash is what companies need to survive something like this, pay workers who are able to innovate from home and continue growth so when the pandemic is over. Big investment money will flow in and new tools will flow out of Microsoft. The good pullback long catch may already have happened around $135-$140 on the stock for the push higher. It’s up to you where to look for the long this time around, but the target would be $190 near its all time high. The stock has already moved about 26% from that long area in just a few weeks. With the potential to move from bottom to highs by the end of the year should the pandemic blow over which is just under 43%.
As for a company that has been around forever and has big money and big names backing it. Coca Cola comes to mind. Will it make crazy 30% leaps after the recession is over in a short period of time? Probably, the potential gain is strong to the upside, if not stronger than that of AAPL and MSFT. With the potential of both dividends and capital gains.
Coke is one of those companies that has been around forever. It’s been a steady stock with multiple dividends and a big name backing it. Warren Buffett is a big KO advocate and the stock is here to stay. The recent dip was large, dropping nearly 50% from recent highs. But the rebound will be that much stronger. The company has a decent amount of free cash flow to boot, sitting just under $10 billion.
From the recent low, the company is up over 30% and has another 30% gain to go to get up to its recent high. We may be looking for a slight pullback to see if we can get the stock for a little cheaper!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.