A lot of investors — most notably Michael Burry — think the next stock market crash could be just around the corner. They might be right, but we’ve been seeing these sort of headlines for some time now.
A year ago, The Guardian ran a piece with the title ‘Is the AI bubble about to burst and send the stock market into freefall?’ Since then, the FTSE 100 is up 21.3% and the S&P 500 has climbed 22.4%.
Don’t wait for a crash
Across the stock market, valuations have been high for a long time. But that hasn’t stopped share prices going higher and there’s no rule that says it has to.
The lesson isn’t that valuations don’t matter, or that doomsayers are unintelligent. It’s that timing a crash is extremely difficult – certainly too hard to be viable strategy.
Anyone who sat out the market on 1999-comparison fears has made a mistake. If earnings fall and multiples contract, today’s buyers won’t be spared, but that was also true a year ago.
More importantly, whether or not this is 1999 again is the wrong question to be asking. The right one isn’t about when to buy – it’s about what price to buy at. Smart investors focus on future cash flows and what they look like relative to current share prices. They don’t spend time trying to predict the next stock market crash.
For billionaire investor Warren Buffett, it isn’t about making stock predictions. It’s about making business predictions — share prices are just the vehicles for expressing those views.
The case for cash flow: Informa
One stock that illustrates this well is Informa (LSE: INF). At around 910p, it’s close to a 52-week high, with £3bn in net debt putting its enterprise value close to £14.5bn.
Against this, £885m in free cash flow represents a 6.1% yield. And at that level, the company only needs 2% growth a year to deliver an 8% return over time. Is that achievable? The group’s current 6.8% annual growth currently clears that bar – and there’s another big event on the horizon to keep an eye on.
The company isn’t at the forefront of the AI revolution, but its business model is a highly cash-generative one and that’s something investors shouldn’t underestimate.
Informa’s Dubai joint venture is targeting 20% annual growth. But with the conflict in Iran now through its 100th day, investors should be watchful around that area.
More generally though, the company is the global leader in the trade show business. And both the firm and the wider industry have responded strongly from pandemic disruption.
Two ways to play it
Investors have two options when it comes to the stock market. One is to look for momentum and hope the winners keep winning, but that only works for investors who can get the timing right.
