What should I buy in a declining market?

Few investors take advantage of crashes while they’re happening. Recognise the signs and buy stocks in a market downturn.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett, arguably the world’s number one investor, has lots of good advice for potential investors. It may surprise you to hear that one of his preferred times to buy equities is during a market downturn.

Fear causes people to panic sell, which is why a declining market is often a great time to buy.

Going against the crowd is not an easy thing to do though. The trick is to be confident in what you’re buying. Do your due diligence, carefully research the companies you’re interested in and only buy shares in businesses that you wholeheartedly believe can go the distance.

Failing to plan is planning to fail

There’s no perfect time to buy and timing the market is difficult for even the most experienced of investors. If you’re confident that you’re buying shares in a quality company and are prepared to hold them for the long term, then the price you pay becomes somewhat irrelevant.

Inspect the company’s annual report. Look for signs of weakness, such as negative cash flow, when the company’s cash payments exceed its income. 

Look for an economic moat which would be a sustainable competitive advantage that will endure. 

Check if the dividend yield is long-established, and whether it has been increasing on a regular basis. Does it have sufficient cover so it’s not at risk of a cut?

Looking at the price-to-earnings ratio (P/E) can give you a sign of whether the share price is trading below fair value. Anything north of 15 could be considered high, while above 20 is probably overvalued. Popular stocks often end up with a high P/E because they’ve been overbought when little else is appealing. These stocks may still be worth picking up during a declining market. 

On the other hand, too low a P/E could be a warning sign. 

Sustainable sectors during a recession

Essential consumer goods such as food and drink tend to do well in a recession as they have longevity. People always need to eat and drink.

Information technology is at the heart of every business nowadays, and that’s only getting stronger. One firm I’ve been keeping an eye on is Meggitt (LSE:MGGT). This company leads the way globally in extreme environment engineering. It’s an innovator specialising in advanced technologies in aerospace, defence, and energy – three areas the world increasingly depends on but is progressively opposed to.

In recent times airlines have been at the mercy of price pressures, increased competition, and the fallout from the Boeing 737 MAX fiasco.

Meanwhile, oil stocks have been in sharp decline because of reduced demand and the economic effects of the coronavirus.

Political instability and the on-again, off-again US-China trade war have done plenty to warrant an increase in demand for defence stocks, but these are also out of favour with climate change activists.

While none of these sectors feature highly among ethical investors portfolios, they are all necessary components of our modern world. Therefore, I think the strong will survive and my favourites in these sectors are Ryanair, BP, and Meggitt.

Meggitt has a £5bn market cap, P/E of 35, earnings per share of 18 and a 2.5% forward dividend yield. 

If you’ve chosen well when buying stocks in a declining market, then when sentiment improves, you’ll be holding on to a portfolio of prosperous stocks with strong share prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Here’s how someone could start investing in 2025 with just £1,000

Planning to start investing in 2025? This writer highlights two very different stocks that might be worth considering for a…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

I asked ChatGPT which UK stocks Warren Buffett might look to buy. It suggested these 5 names

ChatGPT has some ideas about FTSE 100 stocks Warren Buffett might have been buying. But Stephen Wright thinks a closer…

Read more »

Investing Articles

Up 14% today! Here’s one growth stock that Elon Musk likes

A UK growth stock has signed another contract with SpaceX. But does this mean it deserves a place in my…

Read more »

Investing Articles

I asked ChatGPT if the FTSE 100 would hit 10,000 this year. It’s feeling bullish!

The FTSE 100's flying and Harvey Jones is feeling bullish. His obvious next step was to ask a chatbot where…

Read more »

Investing Articles

Near 52-week lows, are these FTSE 100 stocks now unmissable bargains?

Two FTSE 100 titans just can't stop falling in value. Paul Summers looks at whether investors should see this as…

Read more »

Investing Articles

Bill Ackman just loaded up on this top stock for his FTSE 100-listed fund

The well-known hedge fund manager has announced a massive holding in this tech stock for his FTSE 100-listed investment trust.

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Billionaire Bill Ackman has just made a huge bet on this S&P 500 growth stock

Bill Ackman just bought 30m shares in this well-known S&P 500 company. He believes it’s currently trading well below its…

Read more »

Investing Articles

40 and no pension? Here’s what £400 a month in a Stocks and Shares ISA could become

It's never too late to start investing for retirement. Here's how regular contributions to a Stocks and Shares ISA could…

Read more »