Don't be fooled; the current volatility on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) may have been prompted by fears of Greece exiting the Euro Zone, but there is also a real economic slowdown happening locally driving Mr Market's foul mood.
The slowdown means investors will avoid some businesses more than others. Some of the companies most at risk include:
- Companies that rely on consumer spending;
- Companies which do not currently report a profit; and
- Companies with high levels of debt
And as we have seen in cases like Flight Centre Travel Group Ltd (ASX: FLT) and Crown Resorts Ltd (ASX: CWN), the market won't hold back.
The good news is that this creates buying opportunities for high quality, reasonably priced companies. Here are three companies which I think the market is overlooking right now:
1. XERO FPO NZ (ASX: XRO)
Cloud accounting firm Xero is an example of a company without the backstop of positive earnings for investors to rely on. As a result the company has lost 15% of its value in the last month, but remains as strong as ever.
Even in recessions, businesses need accounting systems and although they reduce spending, Xero's subscription style pricing and intuitive use makes it an affordable alternative to investing in an expensive licenced system.
2. CSL Limited (ASX: CSL)
CSL Limited is one of my favourite healthcare companies. It produces lifesaving medicines, vaccines and pharmaceuticals and holds a dominant global market position.
Its position drives significant margins, with Group EBIT (Earnings Before Interest and Tax) margins hitting 29.7% in 2014.
As well as a token dividend, CSL returns cash to investors through an active share buy-back program which will buy up to $950 million this year. The reduction in outstanding shares increases earnings per share (eps) and drives up the share price. The company notes that eps has grown 19% since 2005 as a result.
3. FlexiGroup Limited (ASX: FXL)
Finally, FlexiGroup Limited is an example of a company exposed to consumer spending which has been punished by investors nervous of the fact. Shares have been walloped almost 20% in the last month, increasing the risk/reward profile.
The company has been diversifying its income streams over the last two years and is on track for a strong full year 2015 (FY15) result. The share price weakness has pushed the trailing dividend yield to close to 6% before franking credits. With a payout ratio of just 50-60% of cash net profit after tax, the company retains plenty of cash for further growth.
