Most people know that the sharemarket has been one of the best places to create wealth over the long term. However, when the market dips, it can be difficult to remember that the sharemarket is one of the main drivers of wealth creation.
If you are investing for the long term then these downturns are an ideal time to think about buying at cheaper prices. They say a rising tide lifts all ships but conversely, a falling market often punishes stocks that have a great underlying business. This means bargain hunting time for the astute investor. I would look at companies that are strong businesses with improving profits and low levels of debt.
Three of my favourite areas in the market at the moment are Industrial stocks and Material stocks.
Let's have a look at each of these areas and what they deal in, why they will move up and which stocks to concentrate on.
The Industrial sector includes construction, transport and engineering companies. It has been sold down quite heavily since the start of the year because it is one of the most highly geared sectors. The two largest companies in this sector are Leighton holdings and Brambles. Leighton holdings would be my pick out of the two due to relative share price movements and smaller debt levels.
Leighton's is Australia's largest construction and contract mining group. It is also Australia's largest engineering services contractor. Recently, it has been focusing on moving into India which has huge growth potential. The share price is down 32% since the start of the year. The majority of brokers rate this stock as a buy at the moment. And with work in hand at a record high, it does look like there is plenty of work to keep profits coming in through the door.
Brambles is one of the few international franchises left. It owns the CHEP pallet business. The shares are down 12% since the beginning of the year. It's a very attractive company for takeover but with the credit markets currently experiencing problems, there is little takeover potential. There is the risk that Asicano or Toll will sell their stake in the company which may drive the share price downwards further. From a business point of view, it has a unique niche market, a turnaround plan and a buy recommendation by most brokers.
Material stocks include many mining companies. The two largest ones are BHP Billiton and Rio Tinto. Both companies are diversified miners and have been doing well due to demand from China. India is now stepping up to the plate in terms of demand for raw materials so I think that these two companies are well positioned to profit from demand from China and India. BHP seems to be the pick according to brokers with Rio Tinto having more hold recommendations on the stock at the moment. I like BHP Billton because it has relatively lower debt levels than Rio Tinto which is geared after it's acquisition of Alcan.
It's hard to remember in times like these but the sharemarket has been one of the best places for long term wealth creation. If we are long term investors and if the goal is to buy low and sell high surely we should be looking at buying rather than selling.
Happy investing!
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All recommendations are provided without consideration of any specific reader's investment objectives, financial situation or particular needs. Those acting upon such recommendations do so entirely at their own risk.