Australia's blue chips appear fully valued. Post-GFC fears of market crashes still linger in many investors' minds, and rightly so.
The interconnectedness of world markets and social media are making opportunities and information easier to come by, yet many still invest in such a small handful of Australian companies. The banks, retailers, miners and the rest of the S&P/ASX 20 (ASX: XTL) are the most heavily traded by a long way.
However their size and brand recognition does not make them immune to volatility and huge share price falls. Does the idiom, 'the bigger they are the harder they fall' not pertain to financial markets? During the GFC even the biggest companies on earth, such as Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG), fell by over 45% in less than a year.
However since that time, both companies are up over 300%! That is why it's important to buy companies near their lows, not their highs. Currently, many of Australia's top stocks are reaching all-time highs.
Although now might not be the time to start buying in, we should take a moment to identify what stocks we should buy when the market falls.
High margins, consumer dependency and monopolies are great businesses to buy in market drops. Telstra (ASX: TLS) ticks all those boxes. Telstra's new bundled packages make switching of carriers much harder and its coverage is second to none, it enjoys a return on equity of 30.2% and dominates the telecommunications space.
One company that enjoys a duopoly and boasts very high margins is Woolworths (ASX: WOW). Woolworths actively competes against its rival Wesfarmers (ASX: WES) – owner of Coles supermarkets – but enjoys higher margins and has a number of growth prospects, such as its Masters home improvement chain.
Lastly, the bank I believe will differentiate itself from its Australian peers in the next 10 years is ANZ (ASX: ANZ). ANZ has room for growth in both its domestic and international businesses. Its Asian strategy is promising and it has the lowest share of the domestic mortgage market, allowing it to leverage growth in different markets.
Foolish takeaway
When the market falls, look for companies with little amounts of debt, good cash flow and a strong business model – one consumers use every day. Each of these businesses make money from non-discretionary spending – meaning we require a bank account, food and (believe it or not) a mobile phone and internet.
