It's been a pretty disastrous run for the Australian share market over the past three months.
The 11% fall of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been led by heavy selling of shares in companies which have — at least historically — produced very attractive returns for shareholders.
Indeed, shares of Woolworths Limited (ASX: WOW), National Australia Bank Ltd (ASX: NAB) and Rio Tinto Limited (ASX: RIO) have fallen 8%, 13% and 13.5%, respectively.
But with interest rates at record lows and the property market looking a little pricey, the stage appears set for savvy investors to swoop on top companies in the lower market.
Here's what you need to know about Woolworths, NAB and Rio Tinto.
Woolworths
Woolies has come under heavy selling pressure over the past 12 months (down 30%) as investors reacted to profit downgrades and a looming price war with Coles – owned by Wesfarmers Ltd (ASX: WES). Moreover, concerns over the ongoing profit growth of Coles, Aldi's rapid store rollout and an unprofitable Masters Home Improvement business have each been key catalysts for the struggling Woolworths. Worse still, Australia's largest supermarket operator recently warned of falling profit margins in 2016 as it seeks to employ an aggressive turnaround strategy.
Rio Tinto
Australia's economy is expected to hit a rough patch because the market for major commodities are coming under pressure. Prices of iron ore, copper, coal and aluminium are plunging in the face of slowing demand growth from China. Unfortunately, as Australia's largest iron ore exporter, Rio Tinto is staring down the barrel of a prolonged period of depressed commodity prices. Some analysts believe now could be a great time to invest for a turnaround. However, it's important to remember raw materials markets can take many years to recover, and there's no guarantee Rio will capitalise on a rebound anytime soon. Therefore, it may pay to be patient and avoid buying in. After all, patience won't lose you money.
NAB
Like Woolies above, there's a chance NAB could lower its dividend in the medium-term (three to five years) as competition heats up, and increased regulation takes its toll on profits. Therefore, it's vital investors look beyond the dividend and focus on NAB's ability to grow profits in spite of slowing credit markets. However, despite the proposed divestment of its UK subsidiary, Clydesdale, and the recent sell down of Great Western Bancorp in the USA; I'm not a buyer of NAB shares at this time because I believe a slowing economy will render it unable to beat the broader market. I've previously said that $20 would be a fair price to pay for NAB shares.
Buy, Hold or Sell
I think each of these three companies deserve a spot on Australian investors' watchlists, but Woolworths is the only one I'd consider building a position in at today's prices. However, until it gives investors some clarity over its CEO appointment and sheds more light on the fall in profit margins, I'd rate it as a 'hold'.
