Our market is on the backfoot as fears of an economic slowdown and worries about an ugly "confession season" weigh on sentiment.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fell 0.7% to below the 6,400 level for the first time in two weeks.
The string of profit warnings during this confession season isn't helping the bulls with fresh food supplier Costa Group Holdings Ltd (ASX: CGC) and engineering group Downer EDI Limited (ASX: DOW) the latest to issue disappointing earnings news.
The confession season is the period when companies come clean about their forecast profit as they prepare to close their book for the end of the financial year at June 30.
How to pick stocks during a market sell-off
This isn't generally the time of the year to be buying shares as our market tends to underperform from here through to early July, particularly after the market has run this hard despite the growing macroeconomic headwinds.
A market sell-off can present a buying opportunity but investors will need to be particularly discerning in picking stocks.
Targeting stocks that look to be good value won't be enough to ensure your portfolio outperforms. You will also need to identify stocks least at risk of declaring a profit downgrade as we've seen what can happen to the share prices of these profit disappointers.
What this also means is that avoiding disasters will be more important to the health of your portfolio than trying to pick the ASX shooting stars given how stretched valuations are in general.
Three stocks worth buying on the dip
From that perspective, here are three that I think investors should be putting on their watchlist over the next month.
- Rio Tinto Limited (ASX: RIO): I think iron ore stocks are well placed to make further gains, or not fall as hard as the rest of the market during a sell-off. For one, iron ore prices are expected to stay firm despite the trade war as China will need to offset slowing exports with domestic infrastructure building programs to keep its economy humming. But even if iron ore prices ease, it shouldn't hurt valuations on the sector as the price assumptions used by analysts are comfortably below the US$100+ per tonne that the commodity is trading at. Rio Tinto is my pick in the sector for its stronger balance sheet, its position on the cost curve and its greater exposure to the commodity.
- Aristocrat Leisure Limited (ASX: ALL): The gaming machine maker delivered a cracker of a result this month, which puts to rest any worries about an impending profit downgrade in the near-term. There were worries about growth of its digital division but Aristocrat appears to be winning market share for both the digital and land-based markets. What's more, the stock looks cheap as its on a FY20 consensus price-earnings multiple of a little over 18 times. That's good value for a stock with double-digit net profit growth potential.
- James Hardie Industries plc (ASX: JHX): The US-focused building materials supplier is another that posted a good profit result recently. More significantly, there are signs that market conditions are bottoming in the US. There had been worries that James Hardie would have to downgrade earnings due to the sudden drop in home construction in late 2018. These fears can be put aside for now, and unless the US falls into a recession (God forbid!), the stock should continue to perform well given that eight out of 10 brokers polled on Reuters rate it a "buy".
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