I love investing in quality ASX shares at good prices. Market sell-offs can open up a whole host of opportunities to buy top businesses at appealing valuations.
I often like to write about quality ASX shares, but it's impossible to know which companies will drop the most in a bear market.
Some sectors seem to fall further than others, perhaps because investors are worried about how their profit could be impacted in a downturn. However, because of their lower share prices, these businesses could be among the most promising opportunities at the time.
The next time a heavy market decline comes along, I'll look at the two stocks below.
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Australian Ethical Investment Ltd (ASX: AEF)
Australian Ethical describes itself as one of Australia's leading ethical investment managers, providing investors with investment products that "align with their values and provide long-term, risk-adjusted returns".
Fund management businesses can be some of the most volatile in a declining market because share price drops directly impact their profitability — think lower funds under management (FUM) and lower revenue. That's on top of investors not being willing to pay as high a price/earnings (P/E) ratio for many businesses, compared to before the market dropped.
However, the opposite is true when markets are rising – fund managers get a helpful boost from rising markets.
Australian Ethical is benefiting from consistent contributions to its superannuation segment (due to its mandatory nature for employees). In the three months to December 2024, this ASX share saw the superannuation division experience $0.1 billion of net inflows.
Overall, the business had $13.26 billion of FUM at the end of 2024. I think this can keep rising in the long term, and any volatility in the short term is likely to be a buying opportunity.
Nick Scali Limited (ASX: NCK)
This ASX retail share sells a significant amount of furniture in Australia and New Zealand each year. Furniture retailing isn't exactly the most defensive sector, so I'd understand if investors became worried about the company's performance during the next downturn.
But I think Nick Scali is a top ASX share with quality and aligned management (with Anthony Scali at the helm), a high underlying return on equity (ROE), and an appealing growth plan.
It plans to open more Nick Scali stores in Australia and New Zealand, many more Plush stores in Australia, and build a growing presence in the UK. Online sales growth could also be a bonus for the company.
I think a sell-off for this business would be a useful time to jump on the shares, partly because it has a fairly high dividend payout ratio, which can translate into a large dividend yield when the Nick Scali share price falls. At the moment, it has a trailing grossed-up dividend yield of 6.2%, including franking credits.
