With share prices now significantly lower than they were a month ago, I think it’s a good time to be drip-feeding money into the stock market. For long-term investors, I believe this bear market is likely to create some fantastic opportunities.
That said, I think it’s important to be selective about your investments in the current environment. If we experience an economic downturn in the months ahead, some companies are going to be more vulnerable than others. With that in mind, if you’re keen to buy stocks right now, here’s what I’d focus on.
Balance sheet strength
The first thing I’d look for in the current environment is companies that have balance sheet strength. In other words, companies with a low amount of debt, relative to equity, on their books.
The reason I’d focus on debt right now is that in an economic downturn, companies with a lot of debt can be quite vulnerable. If profits and cash flows drop, servicing that debt becomes more challenging. In the worst-case scenario, companies can go bankrupt.
Some examples of FTSE 100 companies with low amounts of debt on their balance sheets include Hargreaves Lansdown (I bought some more shares here recently) and Rightmove. Both could be impacted in a recession, of course, but I’d expect them to survive due to their financial strength.
Steady earnings
The next thing I’d look for is companies that are unlikely to experience a huge drop in revenues and profits in the event of an economic contraction. These types of companies tend to outperform in a bear market, providing an element of portfolio protection.
Names that come to mind here include the likes of Unilever and Reckitt Benckiser. Both manufacture essential goods such as soap, detergent, and painkillers, which people tend to still buy even in a recession.
Reliable dividends
I’d also focus on companies with strong long-term dividend track records that are unlikely to cut their dividend payouts in a downturn.
Receiving dividends in a bear market is a real plus. Not only do the dividends offset share price losses, but they also enable you to buy more shares at lower prices. This can boost your returns significantly over time.
Some examples of FTSE 100 companies that have fantastic long-term dividend track records include healthcare specialist Smith & Nephew (which I bought more of last week) and Diageo (I also added here recently).
Minimal Covid-19 exposure
Finally, I think it’s sensible to focus on companies that shouldn’t be impacted too badly by the coronavirus. Accounting solutions provider Sage is one FTSE 100 stock that comes to mind here. It should be relatively immune from the disruption (although it could be impacted if a lot of businesses go bankrupt).
I’d avoid companies that are highly exposed to Covid-19, such as airlines easyJet and IAG and hotel operators InterContinental Hotels and Whitbread. These types of companies could be significantly impacted by the disruption, meaning investment risk is high.