It's hard to think about bargain hunting when there's so much blood on the street, but this is precisely the time to put your feet into the water.
If you can overcome the panic that is sending the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) tumbling over 1% during lunch time trade, you will be faced with the next daunting question – which stock to buy when just about everything is trading at depressed prices?
There are two stocks that I think are worth looking at during this bout of market volatility. The first is building supplies company James Hardie Industries plc (ASX: JHX), which I am sad to say has recovered a lot of lost ground this morning.
The stock fell to $17.42 before clawing back to be 0.1% down at $17.81 in the early afternoon. Many would think the stock looks fully valued at this price and who can blame them with the stock trading on a consensus price-earnings multiple of nearly 30x for 2015-16 and a skinny yield of just over 2%?
However, James Hardie could be set for a profit upgrade on the back of its share buyback announcements.
While the buyback is well flagged to the market and should be incorporated into analysts' forecasts, management's comments that it would only buy back stock if it is deemed to be earnings per share accretive has gotten some experts thinking.
James Hardie paid as much as $18.38 a share this month and Morgan Stanley calculates that for the buyback to be EPS neutral, earnings for the current financial year would be US66.7 cents, compared with consensus of US60.2 cents if the average cost of debt was around 4.75%.
This would bring the forecast P/E to a more reasonable 26.7x for 2015-16 and around 23x for the following year.
That's still a premium to the market but that's justified given that James Hardie is in a sweet spot as it is very leveraged to the US economic recovery and the falling Australian dollar, which is sitting under US75 cents at the moment.
Another stock to put on your buy list is telecommunications group M2 Group Ltd (ASX: MTU). While the stock is one of the few to be bucking the big downtrend with its 0.4% gain to $10.66, it is still sitting at the bottom of its three-month trading range.
I think M2 Group's defensive earnings stream will appeal as a safe haven particularly after the Australian Competition and Consumer Commission's (ACCC) draft ruling to lower wholesale copper access pricing by 9.6% compared with an earlier proposal for a 0.7% price drop.
The draft decision by New Zealand's competition regulator, The Commerce Commission, on copper access pricing in that country is also a positive for M2 following the group's recent acquisition of CallPlus Group.
Analysts think this could lift M2's earnings by around 10% for the current financial year, and more importantly, it removes the uncertainty surrounding pricing for access to copper networks owned by Telstra Corporation Ltd (ASX:TLS) and Chorus Ltd in Australia and New Zealand, respectively.
I believe M2 represents good value in light of these positives with the stock trading on a consensus P/E of 15.6x for the current financial year.
Not only is that cheap for a stock that can generate double-digit earnings growth over the next few years but it's also rare to see a defensive stock with such a growth profile.
If you are looking for another solid dividend stock to buy, sign up below to get your free report on the top income stock for 2015-16.
