If you're – like me – on the hunt for quality stocks in this choppy market, chances are Woolworths Limited (ASX: WOW), National Australia Bank Ltd (ASX: NAB) and Rio Tinto Limited (ASX: RIO) are at the top of your list.
Indeed, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has tumbled 14% in the past six months despite interest rates remaining at record lows, so the stage appears set for savvy investors to swoop on top companies in the falling market.
Here's what you need to know about Woolworths, NAB and Rio Tinto.
Woolworths
Woolworths' shares have come under heavy selling pressure over the past year (they're down 30%) as investors reacted to falling profits. Concerns over the ongoing growth of rivals Coles, Aldi and, to a lesser extent, Costco; as well as an unprofitable Masters Home Improvement business have been key catalysts for the struggling supermarket chain. Unfortunately, as Motley Fool analyst Mike King wrote this morning, "be aware that the current dividend yields of the banks and Woolworths may come under pressure in the next few years and could fall." This a very real threat, and investors should be 100% confident in Woolworths' turnaround strategy before committing to a purchase of its shares for the dividend yield.
NAB
As noted above, NAB shares are in the same boat as Woolworths in terms of its dividends possibly falling over the medium term (three to five years). As such, it's vital investors focus on the underlying health of the business and weigh up the value of its growth prospects against its share price. Despite the divestment of its UK subsidiary, Clydesdale, and Great Western Bancorp in the USA, I'm not a buyer of shares in Australia's largest business bank because a slowing economy means it is likely to underperform the market. I think a price of around $20 would present a decent buying opportunity for long-term investors.
Rio Tinto
One of the reasons Australia's economy is coming off the boil can be put down to plunging commodity prices. Iron ore, copper, coal, oil and aluminium are all slumping in the face of slowing demand growth from China. Rio Tinto, Australia's largest exporter of iron ore, is staring down the barrel of a prolonged period of depressed commodity prices.
Some commentators are suggesting that value may be emerging from the steep falls in the price of Rio Tinto shares, however, my advice would be to steer clear of all Australian commodity producers for the foreseeable future. After all, patience won't lose you money.
Buy, Hold or Sell?
I think each of these three companies deserve a spot on Australian investors' watchlists. Woolworths is the only one I'd consider building a position in at today's prices. However, until it gives investors some clarity over its CEO appointment I'd rate it a 'hold'.
