2 top stocks to buy in a market sell-off

A stock market sell-off could be a once-in-a-lifetime buying opportunity. Stephen Wright is making note of the stocks he’d like to buy if prices come down.

| 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.

Young Black woman looking concerned while in front of her laptop

Image source: Getty Images

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.

Key Points

  • Opportunities to buy great stocks at really good prices can be few and far between, but a stock market sell-off can give investors a chance
  • Diageo generates £5bn in operating income using £6bn in fixed assets and its business is protected by strong brands and huge scale
  • Costco has a structural advantage over other retailers when it comes to keeping prices down, which allows it to boost its income with a membership fee

If finding stocks to buy just meant identifying great companies, then investing would be a lot easier than it is. Sadly, price matters, and shares in strong businesses rarely sell at great prices.

Nonetheless, the stock market is volatile and highly unpredictable. That means it’s worth having a list of shares to buy in a sell-off, in order to be ready for when an opportunity presents itself.

Quality stocks

What makes a great stock for an investor to own? The answer comes down to two things. 

First and foremost, the underlying business needs to be one that can generate a lot of cash. This is what drives the return, so it’s an essential part of a great investment.

Second, there needs to be something that acts as a barrier to competitors. A business with great economic properties is unlikely to keep generating returns if it’s easy for others to do the same.

With this in mind, here are two shares I think fit the bill. Both of them look too expensive right now, but either could be terrific if bought at the right price. 

Diageo

Diageo (LSE:DGE) is an alcoholic drinks company. In my view, its business is one of the strongest on the FTSE 100

Diageo generates around £5bn in operating income using £6bn in fixed assets. This means that it ticks the first box – it generates a good return considering how much it costs to run.

Alcoholic beverages can be a crowded marketplace, so there’s a risk of artisanal brands taking market share. But the business has some important advantages that limit this threat

First, Diageo has some first-rate brands. These give the company negotiating power with retailers that smaller participants don’t have. 

Second, its scale gives it a big advantage. It means that marketing, distribution, and manufacturing costs are lower.

The stock currently trades at a price-to-earnings (P/E) ratio of 23, which I think is a lot for a business growing its revenues at 5%. In a market sell-off, though, I’d be looking to buy it.

If the share price dropped sharply, though, things might well be different. I think Costco would be a great stock to own, if only it were available at a substantially lower price. 

Costco

Another stock on my list is discount retailer Costco (NASDAQ:COST). At a P/E ratio of 36, this is quite a way above the level I’d be interest in, but the underlying business looks excellent.

In general, retail companies don’t tend to make great investments. Low profit margins and fierce competition means that inflation can be a significant risk.

This is true of Costco. But the company’s membership fee revenue gives it a source of income that doesn’t depend on product margins. 

This is what helps the retailer maintain lower prices than other retailers. And those low prices keep attracting customers who are willing to pay the membership fee.

Basically, Costco’s two strengths are mutually reinforcing. Customers pay to join because they know they’ll get low prices and the fee revenue allows the business to keep prices down.

The company’s business model is almost impossible for a competitor to replicate due to its size. That’s why I think it would be a great investment at the right price.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »