Guide To Identify Good Stocks Under The Current Volatile Market Conditions

The current state of affairs at the London Stock Exchange and other markets around the globe is very challenging for a regular investor in these markets. There has been all-round selling in the past two weeks, and many of the blue-chip stocks have shed massive proportions of their market valuations and are attractively placed at the moment. Very recently it is being witnessed that some positive momentum has returned to the market which may be due of some value pickers who want to take advantage of this opportunity and look for stocks that are beaten down but are backed by sound businesses. Such chances are scarce to come by and represent a point where the downside risk is much lower, and the investor can benefit by picking stocks both for the medium and the long terms. Today, we will be discussing five important clues that an investor can use to effectively pick some solid stocks to add to his portfolio. Following these ideas may help an investor to realize good long-term returns while assuming reduced risks.

1. Conditions leading to the market bottoming out do not necessarily apply to every stock. When a market is at its bottom, it represents a buying opportunity, but the same logic does not apply to every share in the market. There is a very low probability that the whole market will underperform for sustainably long periods of time. Still, there is a high probability that at market lows several individual stocks may exhibit the inherent weaknesses in their businesses which may continue for a much more extended period. An investor should be mindful of this reasoning before he picks stocks for investment in these market conditions. A good look at a company’s balance sheet and its earnings and various financial ratios for the past couple of years will give a fair idea if the company can withstand a depressive market scenario. Only those companies who have a strong balance sheet and good revenues along with profitability should be preferred by the investors. At the conditions of a market bottoming out, a stock might look cheap because adverse trading conditions have battered it down, but whether it will go up or not when market conditions improve very much depends on the fundamental strengths of the company’s business.
2. Stick to companies with good operating profits – This is another crucial aspect that investors should be very mindful of while picking stocks at market lows. It is likely that a company’s real operating outcomes are weak, but it had been showing good profitability by including non-core incomes like proceeds from the disposal of assets. It has to be kept in mind that non-core revenues are less often than not recurring; hence a company with a weak operating profit is more likely to underperform, whereas a company with a track record of good operating profit is more likely to be consistent and weather all kinds of market conditions. EBITDA, as a percentage of revenues, will give the operating profit margin of a company. This measure is more helpful in determining the health of a company as it excludes non-core incomes and non-cash expenditures.
3. Prefer sectors which are less likely to be impacted – It is prudent to also look out for sectors which will be the least likely to be impacted by a downturn. It is expected that these sectors will have a quicker turnaround, and the stocks will provide a quick return to investors. Also, these sectors are more likely to be generating marginal profitability while the other sectors may be witnessing more severe trading conditions. It is expected that the companies belonging to the constituent industries may not be performing as poorly as the markets may be discounting them due to the impending momentum. This represents an even better investment opportunity to cash in on a known market imperfection that could correct more than proportionately when the conditions improve.
4. Always go for quality companies – Good quality companies are favorites in all types of market conditions. Good companies have sufficient strength to withstand volatile market conditions and excel when the markets are booming. The hallmarks of a good quality company are a reliable and diversified revenue base, a moderate to high operating margin, good cash earnings and sufficient cash balances in its books. The strong cash base of these companies helps them to pay for their expenses and salaries of staff during stressful periods and be least dependent on expensive funding sources to get out of situations like the current one. Quality companies, because of their more extensive revenue bases, can quickly ramp up their market positions in a recovery period compared to other companies. A good quality company will always deliver in the long run, while short term fluctuations will not have much impact on the long-term prospects of these companies.
5. Suitable time to build a dividend portfolio - This is an appropriate time when people can look to build a portfolio of stocks which have a good history of paying dividends and can be bought at attractive prices. Investors can purchase these stocks and enjoy high dividend yields from their portfolios when market conditions improve. These companies, by default, are some of the strongest and the best quality companies in a stock exchange having both a strong operating business and a healthy cash income. Periods of downturns can bring down the revenues of these companies as a temporary phenomenon, but these companies have strong fundamentals and bounce back when market conditions improve. As and when that happens, these companies could revert to their old dividend distribution rates. In a bad market condition, the stocks of these companies may become available at attractive prices. If the dividend yield is calculated based on its long term dividend payout rate, an investor would be able to realize how much benefited he or she can be while in investing in such a portfolio. It may also be possible that the income generated by these passively managed dividend portfolios surpass the returns generated by an actively managed portfolio on several occasions.

There are several other considerations and aspects that may be looked into by investors before venturing into a volatile market. These market conditions are challenging to tread, and any wrong move may cause significant damage to unsuspecting investors. These conditions no doubt represent excellent investment opportunities, but a sufficient amount of time and investment research is necessary to avoid the pitfalls. In these conditions, however, it is always advisable to invest in mutual funds or other such managed investment portfolios, which due to adverse market conditions are available at lower NAVs but have the added advantage of professional management so that investors’ interests are better protected. One note of caution, however, is warranted for investors that choppy market conditions are perhaps the riskiest for people seeking short -term or speculative gains.