Share prices have been dropping lately as investors contemplate the possibility of a recession. As a result, I’m on the lookout for stocks to buy in case markets sell off further.
I’m looking for two things. The first is a high-quality business and the second is a price that is currently too high but might fall to a level that interests me.
There are two companies on my radar at the moment that meet these conditions. The first is a UK industrial company, the second is a US tech stock.
Halma
The first of my stocks to buy in a market sell-off is Halma (LSE:HLMA). This is a FTSE 100 stock that I’ve had an eye on for some time, but I’ve never seen it at a price that I thought was attractive.
Over the last five years, Halma has been one of the best-performing stocks in the index. Its share price has increased by 95% since 2017.
The stock has had something of a reversal of fortunes this year, though. Halma shares are down 31% since January.
I think that the underlying business is terrific, though. When Halma reported earnings in June, income was up 15% from the previous year and revenues were 17% higher.
A lot of Halma’s growth comes from acquiring other businesses. This brings risk in the form of the possibility of overpaying for acquisitions.
As a result, I’m looking for a price below £20 per share before I buy the stock for my own portfolio. That price implies an earnings yield above 3%, which is what I’d be looking for in this type of stock.
Apple
My other stock to buy in a stock market downturn is Apple (NYSE:AAPL). At $167 per share, the stock is a bit expensive in my view, but I’d buy shares for my portfolio if the price came a bit lower.
I think Apple is an outstanding business. The company generates around $118bn in cash and uses less than 10% of this on capital expenditures.
The risk with Apple is that its growth is somewhat slow. With earnings forecast to grow around 10% annually over the next five years, the stock looks expensive.
I don’t think this is a sign that the company has hit a ceiling, though. Apple currently accounts for around 18% of the smartphone market, which leaves plenty of room for further growth.
A couple of months ago, the stock was trading at around $130 per share, which I think is an attractive price. But a strong recovery has moved Apple shares beyond the price I’d be willing to pay for them.
Apple is Warren Buffett’s largest stock investment and I have some indirect ownership of the business by owning Berkshire Hathaway shares, but in a market sell off, I’d buy the stock directly.