Five stocks to buy on any market dips
Global share markets fell heavily last week after US Federal Reserve comments. The bears argued it was start of a correction that would see the market retest its March 23 low.
As fear grew, the market rallied this week after the US Fed said it would buy a basket of corporate bonds and on news of a proposed trillion-dollar infrastructure plan in the US.
Yesterday, there was talk of a potential second wave of COVID-19 in the US and China – the market’s worst fear. A spike in Victorian COVID-19 cases was another emerging concern.
This wild seesawing between the bulls and bears is no surprise. Investors are flying blind given the cloudy outlook for corporate earnings. Central banks have become more important for sharemarkets than company fundamentals, at least for now, because they are propping up asset prices through ultra-low interest rates and bond-buying programs.
This tussle between bulls and bears makes fascinating viewing, but the main game for investors is having a strategy to capitalise on the volatility. Mine is to ‘buy the dips’ rather than rush for exits every time the market is spooked – and have a clear strategy on what to buy.
Make no mistake, there are many risks. The biggest is what happens after September when the JobKeeper program ends and additional JobSeeker payments are wound back. Or when billions of dollars of deferred business and mortgage loan repayments need to be paid.
The market must believe the Australian economy will recover enough by then to offset the end of government wage subsidies. Or that the Federal government, despite its rhetoric, will be forced to extend JobKeeper or a variation of it, to avoid a catastrophic “economic cliff”.
Who knows what will happen? What is clear is the amount of buying support each time the share market falls and signs the economy should slowly start to recover.
For all the gloom, health data on COVID-19 remains encouraging. Restrictions are being relaxed faster than expected. Business and consumer sentiment are improving.
As written previously, I believe the Australian economy will be roaring back to life in the first half of FY22. I do not expect house prices to crash or bad debts to skyrocket.
As such, I regard any sell-off as a buying opportunity. That view could change depending on health and economic data. But for now, the pessimists look too pessimistic. And fighting the Fed – avoiding risk assets when monetary policy is incredibly accommodative – rarely works.
My preference is to buy back into companies featured in this column since March, as part of a ‘buy the dip’ strategy.
Technology was my favoured sector when the market tanked in early March and remains a preferred buying opportunity if a correction happens. Watch money pour back into big tech names here and overseas when the sell-off runs its course.
Domestically, I favour Xero (XRO) because of its defensive revenue profile (accounting software is such a “sticky product” because there are high switching costs to change providers).
I wrote favourably of Xero in this report at $74 on March 4. It now trades at $88.45 and remains my preferred domestic tech idea.
Chart 1: Xero (XRO)
After years of avoiding big-bank stocks, I made a call in this report on April 28 to buy the banks and explained that idea further in a subsequent podcast on The Switzer Show.
The banks were tanking at the time amid fears of spiralling bad debts, shrinking net interest margins, collapsing credit growth and ongoing regulatory action.
I argued that the sell-off was overdone, writing in late April: “It is time to buy the banks. If you already own them, add more if possible. If you do not, take advantage of the best buying opportunity in banks in a decade.” I would add more bank exposure during any sell-off.
Not for a minute do I discount threats facing our banks. Interest rates near zero are a problem for bank margins and bad-debt provisions will need to rise if the “economic cliff” happens and Australia plunges into deeper recession when wage subsidies end.
But I do not see that happening. If you wait for evidence on the economy after September, it will be too late to buy. There is enough margin of safety at current valuations to buy the banks now.
Again, I suggest gaining diversified exposure to the Australian banking sector through the VanEck Vectors Australian Banks ETF (MVB). It is up 22% since I suggested it in late April.
Chart 2: VanEck Australian Banks ETF (MVB)
3. Tollroad operators
I outlined a bullish view on Transurban Group (TCL) and Atlas Arteria (ALX) in this report on April 15. Google and Apple data showed an emerging recovery in traffic activity and road-direction queries.
Both stocks, up just over 20% since that report, are worthy buy candidates during any market sell-off. Their monopoly assets and defensive earnings profile appeal.
Longer term, there is growing evidence that more people will avoid public transport and commute by car after COVID-19. That has been the overseas experience and an Australian Bureau of Statistics survey this week reinforced consumer concerns about public transport.
I know many parents who are driving their kids to school rather than letting them use public transport. Office workers returning to the CBD in coming months will further boost traffic.
Years of record-low rates (important for interest-rate-sensitive infrastructure companies) and governments eager to bring forward transport projects are other sector tailwinds.
Chart 3: Transurban Group (TCL)
4. Diversified miners
Fortescue Metals Group (FMG), BHP Group and Rio Tinto (notwithstanding controversy over its explosion of Indigenous caves) have stood out during the recovery.
The iron-ore price rallied in May, despite uncertainty over China’s economic recovery and the prospect of global recession. Iron-ore supply constraints in Brazil, a key producer at the epicentre of the COVID-19 crisis, supported a higher iron-ore price.
I nominated Fortescue and BHP in this report on April 1. They are up 45% and 20% respectively since then.
Of the two, I favour BHP on valuation grounds and because of its asset diversification. At $36.02, BHP will yield an estimated 7.5% in FY21 after franking credits, on Morningstar numbers.
I am not one to buy mining stocks for yield, given commodity-price volatility. But the quality of BHP’s assets and likelihood of dividend maintenance appeal in this market.
Chart 4: BHP (BHP)
5. Fast-food operators
The more I read about COVID-19’s effects on food consumption, and talk to restaurant owners, the more bullish I am on fast-food stocks.
I wrote favourably about Collins Food (CKF) and Domino’s Pizza Enterprises (DMP) for this report on April 8 and maintain that view. The stocks are up 42% and 31% respectively since that report and are worthy buy candidates during any market sell-off.
Collins, operator of KFC stores, and Domino’s appeal on several fronts. First, a local recession will reduce demand for higher-end restaurants and gourmet casual-dining chains and increase demand for pizza, fried chicken, fish and chips and other cheap fast food.
Second, greater use of cars by commuters is good for fast-food outlets with drive-throughs, notably KFC stores that favour this model.
Third, both chains have potential to increase their share of the home-delivery market, and to capitalise on the potential exit of some smaller competitors after COVID-19. It is likely that both brands picked up a larger number of new customers during the pandemic, some of whom will be converted to permanent customers thanks to popular KFC and Domino’s food apps.
Yes, there are many challenges for Collins, Domino’s and other food chains when the wages subsidies end in September and unemployment benefits are reduced. But their lower-cost food, value proposition and greater pricing power are plus factors in this economy.
Of the two stocks, I slightly favour Domino’s, given its scale and global operations.
Chart 5: Domino’s Pizza Enterprises (DMP)