3 stocks to buy if a big market correction comes

Quality companies bounce back earlier and stronger after market sell-offs.

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I don’t like predicting market sell-offs and corrections. I have never been able to predict one in the past and I don’t think that will get any better. Being right about market corrections is one thing, the other is taking advantage of them.

Investors should make a shortlist of companies that they would really like to buy if they were marked down 20%, 30% or even 50%. It could happen again like the GFC or the dotcom tech wreck. In the past 30 years or so, there have been about five financial crises, so we should be used to them by now.

If you had five minutes to run through your local supermarket and grab up your favourite items all at a steep discount, where would you head to? You’d go for the high quality stuff that is usually at equally high prices, like a big cut of prosciutto.

Likewise, what quality stocks would be great to snap up if the sell-off was short-term and the business wasn’t permanently affected by it?

My list would start off with Flight Centre Travel Group Ltd (ASX: FLT). The company has high returns on equity, capital and investment and its ability to adapt its business to move ahead has been well demonstrated over the past years. I expect more of the same as it expands more overseas.

One that I would not miss out on again this time is REA Group Limited (ASX: REA), which operates the realestate.com.au website. I had my chance to buy up some cheaply thanks to the GFC, but the high PE put me off. While I was worried about getting value for my money it went up about 10 times over the past five years. The same reasons it has grown so well are still in place – strong brand, market leader, growing property market.

Perpetual Limited (ASX: PPT) would round out the set. The fund manager would take advantage of this hypothetical market sell-off by picking up stocks that it sees as bargains as well. Its gains in investment returns would be mine before too long.

It regularly achieves high returns on equity and investment. Since early 2012, its share price has more than doubled to around $50, yet before the GFC it reached about $85.

Foolish takeaway

You should always have your wishlist tucked away just in case of a correction. Sticking to quality companies would be better because they are more likely to bounce back earlier and stronger.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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