When world share markets take a tumble, many investors become anxious and sometimes irrationally sell their stocks. This is not surprising, as the media coverage becomes increasingly negative.
This negativity will be treated as an opportunity by the chief executive of Australian Foundation Investment Company (ASX: AFI), Ross Barker. He stated last week that the market was fully valued and he was prepared to be patient before making new investments. He then went further and said, "a market dip is coming, it's just a matter of when" and that AFIC would look to increase its exposure to both CSL (ASX: CSL) and Resmed (ASX: RMD) at that time.
As Australia's biggest listed investment company (LIC) with a history dating back to 1928, AFIC is well known for its strict long-term buy and hold philosophy. It invests in a well-diversified portfolio of between 70 and 100 stocks and its performance has stood the test of time. This has been achieved by targeting undervalued stocks with long-term sustainable earnings growth.
Speaking at AFIC's half-year profit release, Mr Barker described both CSL and Resmed as "extremely well-run businesses and they've proved their ability to generate returns". At the end of 2013, AFIC had a $62 million stake in CSL, while Resmed didn't feature in its top 25 portfolio holdings. However, should the market fall continue, AFIC will likely deploy some of its $160 million cash on hand.
CSL, the Australian-based biotech company that produces plasma products, is trading near an all-time high, with a P/E ratio of 25. However, it continually proves why it is so highly rated, with a 19% increase in net profit after tax for its most recent financial year.
Resmed is also trading at an elevated P/E ratio of 22. The developer, manufacturer and distributor of medical equipment for treating sleep-disordered breathing, released first-half results last week. These were reviewed by fellow contributor Claude Walker, who made a sound investment case for the company.
AFIC reported a 10.7% lift in interim net operating profit on the back of rising share prices and dividends for the big banks, Telstra (ASX: TLS) and Wesfarmers (ASX: WES). The majority of revenue growth and profit came from $11 million in special dividends paid out from the demergers of Brambles' (ASX: BXB) document management business and Amcor's (ASX: AMC) local operations.
In a portfolio valued at $6.2 billion at the end of 2013, AFIC's single largest investment is a $660 million holding in Commonwealth Bank of Australia (ASX: CBA) , followed by $590 million in Westpac (ASX: WBC) and $569 million in BHP Billiton (ASX: BHP).
Foolish takeaway
In my opinion, both CSL and Resmed are ideal blue-chip holdings for an investor with a medium-to-long-term approach. The benefits of this investing style have been demonstrated by AFIC's outperformance over an extended period.
If you are contemplating buying or adding to your existing holdings of these stocks, making regular smaller investments is one approach to overcome widespread negativity associated with a falling share market .
