The first quarter of 2020 has been a fairly tough one for stock markets. Stocks have fallen across the board, with only a few exceptions.
Stocks are likely to remain under pressure given that factors like low commodity prices, weak growth in China, and bank worries are plaguing investors. This is not the best time to buy stocks but if you are looking to do so, here are some names that could be good bets.
As an investor, you need to figure out if there is a margin of safety in the stock you want to buy. The following are pointers can help you to choose a best stocks to buy right now:
*Valuations – A company’s PE ratio has touched its average historical PE level five times in the past three years. This tells you that this might not be a good time to buy it. On the other hand, if its PE ratio is at one-third of its average historical PE level, then it could be seen as cheap and an opportunity.
*Earnings growth – Every quarter, analysts revise their estimates for earnings over the next five quarters. If you are seeing a sharp drop in estimates over the last three months, it means that something has gone wrong with the company for this to happen. This doesn’t give you much confidence about earnings growth.
*Company’s business – The way a company’s business is going tells you if its products or brands still have traction in the market. If you are seeing a drop in demand, it is best to stay away from it.
*Margin of safety – A low PE ratio, good earnings growth over the last five years, high return on equity and stable dividend yield should give you enough confidence about investing in a company at this point in time.
Following are some stocks that meet these criteria:
Petrobras (PBR)
Brazil’s largest oil company, Petrobras is also one of the cheapest large-cap stocks available in the market. The stock trades at a P/E ratio of around six times its estimated earnings for 2020 and has given 37% annual returns to shareholders over the last five years.
It is also one of the highest dividend yielding stocks in the market with an estimated yield of 6.5% for 2020.
Dish Network (DISH)
With a return on equity of 19%, shares of Dish Networks offer investors an opportunity to invest in a good company which has been steadily growing its earnings since 2016. The stock also offers a yield of 5.7% for 2020 and is trading at a P/E ratio just under seven times.
Another factor that works in the company’s favour is its debt-free position which helps free up cash flow and boost shareholder returns. Its revenue grew by 3% in 2017 and analysts expect it to grow at a similar pace this year as well.
Adani Ports (ADANIPORTS)
One of India’s largest ports, Adani Ports traded at a price-to-book ratio of 0.5 times in 2018 and has an estimated dividend yield for 2020 of 6%. At the same time, the company is currently trading below its 30 days moving average which is a positive sign.
Its revenue growth has been fairly consistent at around 11% each year for the last five years and with good cash flows, the company manages to pay out dividends to shareholders as well.
United Spirits Limited (UNSPORTS)
With a market cap of Rs 1,600 crore, United Spirits offers huge opportunities for investors looking to buy small- and mid-caps. The company is expected to report earnings growth of around 35% for 2020 and trades at a P/E ratio of just under nine times its estimated earnings for the year.
While it has seen negative earnings growth over the last three years, analysts expect this trend to reverse itself quickly. Its debt level is low and the company’s top line has grown at a strong 18% CAGR over the last five years.
Invest in small and mid-cap companies
When you invest in small and mid-cap companies, there is always a chance that things could go wrong. However, if you follow these steps while picking stocks for your portfolio, then you should be good to go:
*Don’t overdo it – If you’re investing in 30-35 stocks, chances are that your portfolio’s performance will suffer because of the higher number of stock picks.
*Do your research – Don’t rely on analysts’ estimates and PE ratios alone; read customer reviews as well to make an informed decision about a company.
*Take it slow – If you have a long-term goal in mind, then it is best to invest in stocks that offer value at all price levels.
*Don’t just trust the PE ratio – The PE ratio is an important metric but doesn’t tell you everything about a stock’s potential. It’s also important to look at factors such as return on equity and debt levels.
Conclusion:
The next time you’re out hunting for good stocks to buy, follow these steps and you should be able to find at least one stock that will offer value at any given price point. And remember: The costliest mistake you can make as an investor is buying a great company at too high a price.
