When shares in a company you like fall sharply, it’s worth asking why. Has something fundamental gone wrong with the business, or is it just a minor bump in the road?
Selling stocks because of short-term weakness can be a costly mistake. In these situations, I often consider using the weaker price to top up my holding instead.
I believe we’re likely to face more market volatility this year, so today I’m looking at two companies I’d be happy to buy on the dips.
Cleared for take off
Travel firm Dart Group (LSE: DTG) is best-known as the owner of the Jet2.com budget airline and the Jet2 package holiday business. The firm’s stock hit a patch of turbulence last year after heavy investment dented profits and Brexit fears hit airline stocks.
Investors who took advantage of this wobble and topped up at 500p will be smiling today. Dart stock rose by 16% to 750p this morning, after management said results for the year to 31 March would be “materially ahead of expectations”.
The word “materially” suggests to me that profits will be at least 10% higher than expected. I estimate that earnings for the year could be around 58p per share. Even after today’s gains, that leaves the stock on a forecast P/E of 13. That seems affordable to me, given the company’s strong balance sheet.
What could go wrong?
The airline and holiday industry is heavily dependent on consumer spending. A recession could hit profits hard. With fuel prices rising again, higher costs could also be a risk.
At this early stage, Dart Group expects profits next year to be broadly unchanged. Although flat earnings might not sound very exciting, I’d remember that this company has a history of beating expectations. Dart is definitely a company I’d buy on the dips.
Better than gold?
Tequila has sometimes been referred to as liquid gold for its colour and purity.
The Mexican tipple is only one of the spirits sold by FTSE 100 drinks giant Diageo (LSE: DGE) in more than 180 countries around the world. The group’s portfolio of 200+ brands, and its global reach, both mean that this £61bn behemoth should be fairly well protected from localised problems.
Indeed, I’d argue that Diageo is probably one of the most defensive businesses you can find, including gold. In a recession, people may trade down to cheaper brands, but will rarely stop drinking altogether. When times are good, trading up to premium spirits is a popular feelgood choice.
A buying opportunity?
Like Dart, Diageo stock is prone to occasional dips. Historically these have been good buying opportunities. Given this, I’ve been wondering whether recent falls — the shares are down nearly 10% from last year’s high — are enough to justify a buy.
I’m not yet convinced. The stock still looks quite expensive to me, on a 2018 forecast P/E of 22. Earnings per share growth is also expected to slow from 18% last year to just 5% this time, as favourable currency movements are reversed.
Although the 2.6% dividend yield is starting to look tempting, I’d prefer to have something a little closer to the FTSE 100 average of 4%.
I’m going to continue watching Diageo for now, but it’s definitely a stock I’d consider buying on the dips.
10 steps to £1m
A £5,000 investment in Dart Group in 2013 would be worth £25,000 today. Investing in quality growth stocks and holding on through the dips can be a winning investing technique.
If you'd like to know more about how this strategy could help you build a £1m stock portfolio, download Your 10-Step Guide To Making A Million In The Market today.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.