As inflation spooks markets, I’m looking for the best shares to buy on the dips

When looking for the best shares to buy, I primarily focus on the individual business, rather than what’s happening in the wider economy.

Does the company have a strong balance sheet? Is debt under control? Is its pension scheme a burden? How competitive is its market? What are the barriers to entry? Could a new challenger steal its customers? How sustainable is the dividend? Does the share price look undervalued or overpriced?

These will help me determine which shares are the best to buy for my portfolio. Doing my research like this doesn’t guarantee success, of course. No investor can guard against unexpected shocks. Either macroeconomic, such as the financial crisis or the Covid pandemic, or an individual company disaster, such as the BP Deepwater Horizon rig blow-out, or the Tesco accounting scandal.

I’m after the best shares to buy

One way I like to turn the odds in my favour is to put favourite stocks on my watch list after their share price has fallen. I love buying stocks on the dips, just as I like hitting the sales. Who doesn’t want to pick up quality business at a bargain price?

The FTSE 100 has had a good run lately, bursting through the 7,000 barrier. That’s despite investors increasingly fretting about the risk posed by inflation.

The shock leap in US inflation to 4.2% has concentrated minds. Many fear that monetary and fiscal stimulus pumped out to combat the pandemic will drive up costs and prices. There are signs of this already, with copper shooting past $10,000 a tonne, and lumber prices tripling.

Even the best shares my money can buy today will be vulnerable if inflation catches fire and forces central bankers to hike interest rates. Rising yields will also divert money out of equities, making bonds more attractive.

These stocks could combat inflation

If this scenario pans out (and it may not), then it still wouldn’t change my strategy. I’d keep hunting through the market for the best shares to buy today, with the aim of diving in whenever the stock market falls back.

Inflation may change the actual stocks I want to buy. Today, I’d focus on companies with pricing power, say, consumer staples firms Reckitt Benckiser Group and Unilever, and spirits giant Diageo, which has a strong range of premium brands. The concern here is that if inflation eats into people’s spending power, it’ll hit sales.

I might also look for the best shares to buy in the commodity sector, such as BHP Group and Rio Tinto. They should benefit from rising metal, mineral and energy prices. The problem here is that the stocks have been soaring, rather than dipping. So there may be less of an opportunity to snap them up at a discounted price.

I’m keeping an eye on inflation, but I’m not going to let it dictate my thinking. As always, my main focus is on the best shares to buy today. Unlike inflation, that’s something I can control.