While it is painful to watch the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) crash 1.7% today, you could say this is the market meltdown we had to have. Equities have been on a long winning streak and something had got to give. But this is just a rebasing of interest rates and valuation, and the sell-off is unlikely to last long even though it is difficult to predict when our market will bottom. Don’t let a good market correction go to waste though. This could be the best buying opportunity for the next three to six months and there are three stocks…
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While it is painful to watch the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) crash 1.7% today, you could say this is the market meltdown we had to have.
Equities have been on a long winning streak and something had got to give. But this is just a rebasing of interest rates and valuation, and the sell-off is unlikely to last long even though it is difficult to predict when our market will bottom.
Don’t let a good market correction go to waste though. This could be the best buying opportunity for the next three to six months and there are three stocks that I will be looking to top up or buy if the market shake-up deepens as I am hoping.
The first BHP Billiton Limited (ASX: BHP). While resources are leading today’s sell-off on the back of a drop in commodity prices, I believe they will come charging back.
For one, global economic growth is expected to pick-up speed this year and inflation could rebound after hitting record lows. Both of these factors are supportive of higher commodity prices – not lower.
What this means is that the strong rally in resource stocks is unlikely to be over and it’s interesting to note that the sell-down of the sector was done on the back of reasonably light volumes. That’s a sign that investors are not panicking.
BHP Billiton is one of the best placed to benefit from a recovery in commodity prices and I am expecting the Big Australian to report a swelling in free cash flow, which will prompt management to announce a capital return of some sort as well as an uplift in dividends.
The second is blood products maker CSL Limited (ASX: CSL). It’s a market darling and the stock has been on a tear over the past year. I am hoping for a big pullback in its shares to around the $130 mark before buying (maybe it’s wishful thinking on my part).
CSL is well placed to deliver a strong half year result this month. Not only will it benefit from US President Donald Trump’s big tax cut due to its large exposure to that market, but it is also benefitting from the terrible “Aussie Flu” that has hit the world’s largest economy.
Analysts expect CSL to report a jump in flu vaccine sales and I can’t see anything that will kill off the stock’s strong momentum over the short to medium term.
The third stock is construction and engineering group Downer EDI Limited (ASX: DOW), which is down big time today as it shed 3.8% to a four and a half month low of $6.62.
It didn’t help that management decided to announce on Monday that it would write-down $77 million in the carrying value of its mining division after losing two big contracts and failing to find enough new work to replace them.
But the write-down is non-cash and management is sticking to its FY18 underlying net profit after tax and before amortisation of acquired intangible assets (NPATA) of $295 million before minority interests.
The write-down is one thing but Downer’s inability to find enough new work is a little disturbing given that the mining projects are roaring back thanks to the unexpected resurgence in commodity prices.
Still, I am bullish on the outlook for Downer due to its exposure to both mining and infrastructure development with state and federal governments committing to a significant number of new projects.
If the market shake-up continues, I would expect Downer to drop towards the $6 mark. I would consider that to be a great entry price.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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.