What would you do if the market sold off 15%?
The S&P/ASX 200 Index (ASX: XJO) (Index: ^XJO) has come close to a full correction with close to a 9% decline from an early September high. It may have gotten a few days of relief, but the market could still slip from here.
Investors should regularly be prepared for a sell-off of 10% – 30% to happen in any year. The best way you can prepare for it is to assume it will happen and get over the fear.
If your broker ran a promotion saying that today only all stock purchases are 20% off, would you be fearful or disappointed? Not in the least!
You'd quickly make a list of the best stocks to maximise your savings and potential share price gains.
What would be on yours?
I would look for solid companies that could power through a downturn because they have-
1) a premium product or service consumers are drawn to
2) sizeable profit margins and earnings
3) a special market niche or a product that is protected from new competitors
That makes me think of CSL Limited (ASX: CSL), the biopharmaceutical company known for its medical products such as blood plasma and treatments for blood and viral diseases.
Its profit margin is regularly over 20% and the demand for life-saving plasma for patients never lessens. The specialised products attract a premium price and earnings keep on rising. The company has just announced a $950 million share buyback, its eighth one in the past decade. It invests in itself because it knows it is a good buy. This is the kind of solid and consistent money-spinner you should have in your portfolio.
SEEK Limited (ASX: SEK) and REA Group Limited (ASX: REA) would be two great picks for companies that have a thorough command of a market. SEEK's job search website seek.com.au has the largest share of job-hunting visitors in Australia. That makes it the centre for job recruiters and advertisers to be on. This demand regularly generates double-digit profit margins and earnings growth.
REA Group is similarly successful with the number one property search website realestate.com.au. The rate at which the company has grown is astounding. Even after 10 full years of high growth, analysts forecast earnings to rise around 28% annually over the next two years. That is the kind of growth that can power through a downturn.
The market dominance of these two companies keeps customers, advertisers and businesses coming back again and again.
