Why I think these shares are a buy prior to a Santa Rally

The weakness in the share prices of our most loved stocks may mark the start of the market pull back we had to have. The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has been running hot with the index up around 11% this calendar year.

If you look at how our market behaved over the past five years, you find that November is almost always a weak period for the top 200 stock benchmark just before the “Santa Rally” when shares run higher in the two weeks before Christmas through January the following year.

I strongly suspect we will see the same seasonal pattern unfold this time, although the pull back is happening a little later than I anticipated. The current sell off is triggered by valuation concerns, which I consider to be a short-term thematic.

But business and economic conditions are robust and you only have to look at the record business sentiment reading from the National Australia Bank Ltd. (ASX: NAB) yesterday if you had any doubts.

While some sectors will remain under pressure due to structural issues, profitability is on the up across our economy and that will lead to higher employment and wage growth.

This isn’t unique to Australia. Economic and business gauges around the world have also been generally pointing to an uptrend. This won’t save us from bouts of market volatility, but conditions are not quite right yet for a sustained market correction.

This is why I believe any weakness on the S&P/ASX 200 will be reasonably shallow – at less than 10%. The market is also likely to stay weak till mid-December. This means you don’t need to rush to buy the dips and can pace yourself over the next two or three weeks to position your portfolio for the Santa Rally.

The question is what stocks should you target?

I am overweight on large miners and I believe they are still well placed to outperform in 2018 due to their cost advantage, low debt levels, cash generation ability and the reasonable outlook for commodities.

From that perspective, it’s hard to look past BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) even though they have been outrunning the market.

I would also look at companies with strong management teams, positive trading conditions and/or strategic assets. The names that come to mind are engineering group Downer EDI Limited (ASX: DOW), port and logistics company Qube Holdings Ltd (ASX: QUB), four-wheel drive accessories company ARB Corporation Limited (ASX: ARB), blood products group CSL Limited (ASX: CSL) and building materials supplier Boral Limited (ASX: BLD).

Hungry for more buy ideas? Click on the free link below to see other growth stocks uncovered by the experts at the Motley Fool that are well positioned to rally in the year.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Boral Limited, and Rio Tinto Ltd. The Motley Fool Australia owns shares in NAB Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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