Many investors are taking advantage of the falling stock prices as the S&P/ASX 200 Index (ASX: XJO) (Index: ^XJO) has sunk down this past month. They know it's time to look for any bargains that Mr. Market offers up. But even when you're on the hunt for discounts, you still have to know what you're buying.
Like Warren Buffett's mentor, Ben Graham, wrote many years ago:
"Investment is most intelligent when it is most businesslike"'
A discounted stock may be cheap for a reason. We want to see that only the share price is distressed, not the company. Look for companies with stable financials, a regularly good return on equity, a healthy profit margin and/or earnings growth.
In looking over the recent stock movements, several companies seem buying opportunities.
The share price of Flight Centre Travel Group Ltd (ASX: FLT) is about $40.50, down from around $54 in April. It has grown its travel agency network internationally and its FY 2014 full year revenue and underlying net profit rose 13% and 9.8% respectively. Despite that, the market is not so thrilled when the Aussie dollar is down and consumer spending is weak.
But if you look closely, you'll notice the company only has $2 million in long-term debt compared to $206.9 million in net profit, so its finances are very solid. Even analysts forecast an average 8.3% in earnings growth annually for the next two years, so it's not distressed at all.
Its 15.4 price-earnings ratio is below its sector's average and the dividend yield is a decent 3.9% fully franked. The company has a strong expansion program in the US, UK and Asia, so I think today's prices are fair and attractive for the potential growth.
Another stock that caught my eye was ResMed Inc. (CHESS) (ASX: RMD). It's not down in share price by a great amount, but still off from its highs. It just released a new sleeping aid device for sleep apnea sufferers which will definitely drive sales. It uses a non-contact system including bio-motion sensors that can be controlled and monitored through a mobile app.
The company has a strong record for earnings growth and not too long ago started paying a dividend. Its yield is 2.1% unfranked. Also, another good point is that it gets over half of its revenue from North and Latin America, so with a weaker Aussie dollar, its US dollar-denominated earnings get a boost from the currency exchange. Healthcare stocks are usually good, stable earners for investors, but ResMed has that added extra of being a solid growth stock.
It is at a 20 price-earnings ratio with forecast 12% earnings growth for next year, so I would like to see the stock come down another 5% more to have a better margin of safety.
I prefer Flight Centre even though the earnings growth forecast is smaller because I understand the business better. If neither of these are of interest to you, there's one tech stock that has very attractive prospects.
