Costco

Top of my list is Costco. The stock is down around 17% since the start of the year and I think this could be a great time for me to pick up some shares.

Costco sells products that people use each day and it has a reputation for having the lowest prices around. I believe that this will allow it to do well as household budgets come under pressure.

With a price-to-earnings (P/E) ratio of around 35, the stock isn’t cheap and this brings risk. But the prospect of 11% forecasted earnings growth in a stable sector attracts me to Costco shares.

Experian

I also see Experian (LSE:EXPN) as one of the best stocks to buy now for my portfolio with inflation on the rise. The share price has fallen by 26% since the beginning of January.

Experian’s business is built on a database that is nearly impossible for a competitor to replicate. I think that this will help in an inflationary environment for two reasons. 

It means that the FTSE 100 business doesn’t have significant maintenance costs, protecting it from rising prices. It also allows Experian to increase prices, since competition is limited.

The risk with this stock comes with the possibility of rising interest rates reducing demand for loans. But I believe the decline in the company’s share price means that there’s still a return for me. 

Mastercard

I also have Mastercard as one of my best stocks to buy now. The stock is now 20% lower than it was at the beginning of the year.

I think that Mastercard actively stands to benefit from inflation. Higher prices mean bigger payment volumes, which in turn means more revenue for Mastercard.

The biggest risk is that rising interest rates might eventually cause payment volumes to decline as consumers spend less and save more. With inflation still high, though, I think this is some way off.

NextEra

Lastly, I have NextEra Energy (NYSE:NEE) on my list of stocks to buy now. Shares in the company have fallen by 20% this year.

NextEra’s business is protected from competition by regulation. In exchange, the amount that it is allowed to earn in net income is set at a defined level.

This means, however, that the company is allowed to increase its prices in order to offset higher input costs. And its regulatory protection means that there’s no possibility of consumers moving elsewhere.

Once again, the risk is that the stock is expensive. At a forward P/E ratio of around 23, it’s more expensive than other utilities stocks.

As I see it, though, the risk is offset by NextEra’s premium assets. It owns some of the best sites for wind and solar energy generation and I think that these will prove to be worth paying for today.

Here are three beaten-down stocks that I reckon the market is underestimating long term.

The UK’s leading online auto platform

Auto Trader (LSE: AUTO) is the UK’s largest online car sales platform. It’s a digital marketplace where individuals and car dealerships can advertise and sell vehicles. Crucially, the company doesn’t hold car stock itself, which makes the company very profitable.

The share price of Auto Trader is down 28% so far this year. The market naturally seems worried about the impact a recession could have on the demand for used cars.

Yet for now, demand remains robust. Full-year revenue rose to £432.7m this year, which is 17% higher than pre-pandemic levels. Operating profit rose 88% year on year to £303.6m. These are healthy numbers.

I like the company’s low cost base, which means most of the revenue from new users advertising on the platform becomes profit. It also has a few attractive avenues of growth left to pursue, such as car finance options on the site and vehicle leasing.

Data giant

Experian (LSE: EXPN) shares are down 25% this year. Again, the market seems concerned about the impact a recession and higher interest rates could have on demand for the company’s credit checks. Fewer people taking out loans won’t be great for Experian, which makes most of its money selling credit reports to banks and credit card companies.

However, on the flip side, a recession and rising bills could be exactly the time when people will be seeking credit. Either way, Experian has a dominant position in its industry, with credit information on 1.4bn people and 191m businesses worldwide. Over the long term, I see worldwide demand for credit (and Experian’s services) growing strongly.

One risk I see with Experian, though, is its valuation. With a current price-to-earnings (P/E) ratio of 24, that is much higher than the FTSE 100 average.

Still number one

Rightmove (LSE: RMV) runs the UK’s largest online property website. It’s extremely profitable, with an operating margin of 73%. Customers now spend an average of 1.5bn minutes on its site per month.

Yet the company faces headwinds with rising mortgage rates and a predicted slowdown in the housing market. This is reflected in the share price, which is down 39% since January.

Even so, Rightmove remains the go-to portal for buying and selling property in the UK, with an 84% market share. I expect it to easily survive any downturn and keep growing its profits for years to come.

Strong companies not only survive economic downturns, they usually emerge stronger from them. I think that’ll be the case with all three stocks here.

Experian has worked its way to the top of my buy list for November. With more bad economic news likely in the coming weeks, I’m waiting to see if Auto Trader and Rightmove shares fall further before pulling the trigger.

Here are four elements of his investing philosophy (with quotes) that led me to consider adding Experian (LSE: EXPN) to my holdings.

Buy wonderful companies

“Time is the friend of the wonderful business, the enemy of the mediocre”.

Buying wonderful companies sounds simple and obvious, but this principle is too often ignored by investors. Following this principle makes my job so much easier because it disqualifies many stocks straight away.

It helps me rule out mediocre companies with no competitive advantages. It rules out most penny stocks for me because they’re not yet generating meaningful revenue. And it certainly disqualifies smouldering wrecks like Cineworld. Basically, it massively reduces the size of the pond where I fish for stocks.

I think Experian qualifies as a wonderful company. It is a data and analytics specialist with a dominant position in its industry. It collects and aggregates credit information on over 1.4bn people and 191m businesses worldwide. That includes over 235m individual US consumers.

It hasn’t become so successful (and trusted) over time without being wonderful at what it does.

A deep moat

“A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable”.

Experian’s business model is very powerful. Lenders give Experian raw credit history data for free, then this data is analysed and sold back to them in the form of a credit report. Banks, credit card companies, and landlords are some of the types of customers that rely on Experian.

Every time it receives and aggregates more data, Experian’s competitive edge is reinforced. This vast amount of credit information adds up to a very deep moat around the company. Good luck to new competitors attempting to gather the data necessary to unseat Experian!

Profits and dividends

“We all hope for capital gains, but the only thing we can really count on is the dividend”.

Experian is a profitable business. It has an operating margin of around 23% and an overall profit margin of 18%. The dividend yield stands at around 1.6%. I think Warren Buffett would approve.

Mr Market

“Be fearful when others are greedy and greedy only when others are fearful”.

Mr Market is a fictional character invented to highlight the seemingly irrational daily moves in share prices. ‘He’ is extremely erratic and prone to mood swings, offering us high prices one day then low prices the next. This is obviously relevant to today’s markets, where the selling often seems indiscriminate.

Buffett advocates greedily buying shares while fear is running high. The share price of Experian is down 26% in 2022. It now has a price-to-earnings (P/E) ratio of 23, which still isn’t cheap compared to most companies.

But it’s a cheaper valuation than Experian has generally traded at, and it could get even cheaper if markets fall further. I’d like to start accumulating shares of this wonderful business while others are fearful.

Filling out my ISA this month is a bit of a risk, since I won’t be able to add funds to that account again until April. But share prices to me look attractive enough to justify buying now, rather than waiting for bigger dips. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Great businesses

I’m concentrating my attention on what I think are the highest quality UK stocks. And there are two metrics I’m using to measure this.

The first is how much operating income a company can generate using its tangible assets. The second is what proportion of their operating income becomes free cash.

I’ve got quite a few UK stocks on my radar, but I’ll concentrate on two here. They are FTSE 100 stock Experian and FTSE 250 stock Diploma.

These generate strong profits. Crucially, though, they don’t have to reinvest much of the money they make, allowing them to provide a return to their shareholders.

Experian has a 329% return on its tangible assets and 94% of its operating income becomes free cash. Diploma returns 144% on tangible assets, 92% of which is available to shareholders.

Stocks to buy in October

These are the kinds of great businesses that I like to own in my Stocks and Shares ISA. And I’m especially interested in buying them in October.

Experian now has a market cap of £24bn. Given the company’s debt and assets, it generates a free cash return of over 4%.

There’s clearly risk with this business with the number of mortgage applications declining. But I think that this could be a great value proposition for the long term.

With a market cap of £2.8bn, Diploma currently offers a return of just over 3.5%. I’m extremely confident in the company’s ability to grow its earnings over time, which makes the stock attractive to me at these levels.

As with Experian, Diploma shares carry a risk with the prospect of an economic slowdown. But this is another stock that I’m keen to buy while I think that the market is mispricing the company’s longer-term prospects.

Following Warren Buffett

Warren Buffett says that it’s better to buy a great business at a fair price than a fair business at a great price. So I’m focusing on quality UK companies, like Experian and Diploma.

But Buffett also says that it’s possible to pay too much for a wonderful business. That’s why I wasn’t buying Experian shares when they were priced at £36 or Diploma shares at £35.

At today’s prices, though, I think that these companies offer promising returns for shareholders. As such, I’m looking to buy both in October to fill my Stocks and Shares ISA.

Here are two that have really caught my eye.

Experian

Like many UK-listed companies, credit checker Experian (LSE: EXPN) is having a pretty lousy 2022. As I type, the shares are down 28%. That gets my attention.

Yes, there are risks here. It’s reasonable to suppose that a slowdown in spending will mean a reduced need for its services. Put simply, there’s no need to check a person’s repayment history if they’re not applying for loans and cards.

On the other hand, it’s also logical to think that this is precisely the time when people and businesses will be seeking credit in an effort to cope with higher energy bills. So, perhaps trading will prove resilient?

Regardless, Experian’s shares now change hands at a price-to-earnings (P/E) ratio of 21. While not screamingly cheap at face value, we need to put this in context. It’s five-year average on this metric is a heady 31. Seen from this perspective, the current price looks like a cracking deal for a company that consistently generates fat margins compared to other stocks in the FTSE 100.

Another bonus is the income on offer. A very affordable-looking, near-2% yield also means I’m being paid to be patient.

Rightmove

A second top stock to buy, at least in my opinion, is property portal Rightmove (LSE: RMV). Like Experian, this firm is having a rotten 2022 with shares tanking 39% as I type. Quite a lot of this fall has only come in the last month as the market has become jittery over how further hikes in interest rates will impact the housing market.

I’m not about to say that the market is overreacting here. With people already struggling with higher energy bills, it’s logical to suspect that moving to a new property won’t be high on their agendas. That could impact profits at housebuilders, building suppliers, and, frankly, any company involved in the sector.

Despite this, Rightmove is the sort of stock I’d be looking to hoover up on such concerns. As an online business, its costs are way below those of your typical bricks and mortar-related firm. Returns on the capital — essentially what a company gets back for the money it puts in — are consistently among the highest in the whole UK market. Theoretically, this should help my money compound at a better rate compared to a business that throws cash around but for little benefit. Speaking of cash, Rightmove’s finances look seriously robust.

At 21 times forecast earnings, shares in this market leader are also substantially cheaper than their five-year average (32 times). Lovely!

Buyer beware

As interested as I am in acquiring shares in Experian and Rightmove, one needs to be aware that their prices may continue falling for some time to come. Given this, it might be better for me to commit to drip-feeding money into these stocks.

That said, I wonder how much pain is already priced in. With markets in an absolute funk, it won’t take much good news to bring out the bulls. Adopting a long-term perspective will also help.

High revenue expectations

First, Experian (LSE:EXPN) reiterated its full-year guidance in a report for the three months to 30 June. At the time of writing, the shares are trading at 2,770p. 

In the same results, the credit reporting firm stated that revenue grew by 7%, with full-year revenue expected to rise by between 7% and 9%.

The business has been benefiting in the last couple of years from a very active property market.

However, Citi downgraded the company in August to ‘neutral’. It provided a couple of reasons for this move, including a decline in housing transaction volumes. In July, for instance, housing transactions fell by 20% year on year.

While this may be worrying in the short term, it’s probable that the housing market will pick up again at some point soon.

What’s more, the business has enjoyed attractive earnings growth over the past five years. For the years ended March, between 2018 and 2022, earnings per share (EPS) rose from ¢94.4 to ¢124.5. This means that the firm has a compound annual EPS growth rate of 5.7%. I consider this consistent and appealing. 

11.88% yield!

Second, Rio Tinto (LSE:RIO) may offer both growth and income to me. It’s widely known to boast one of the highest dividend payments on the market, paying $10.40 per share in 2021. This equates to a dividend yield of around 11.88%.

Last year, the mining firm benefited from elevated commodity prices. Between 2020 and 2021, for instance, pre-tax profit grew from $15.3bn to $30.8bn. 

Recently, however, a market slowdown and possible recession has led to deteriorating results.  

Despite this, demand for base metals, particularly copper, is set to increase in the coming years. That’s because these components are critical for environmentally-friendly products, like electric cars. 

As such, I think there’s a strong possibility that commodity prices will rise in future. This could be good news for Rio Tinto.

The business has been making strong efforts to expand in the copper market, making a $2.7bn bid for Mongolian copper mine owner Turquoise Hill Resources. 

This bid was unsuccessful, but Rio Tinto acquired the company after increasing its offer to $3.3bn. This may allow the business to engage in further copper exploration, thus supporting long-term production plans.

Overall, both of these firms undeniably face challenges in the short term. With investing, however, I prefer to look beyond the end of my nose. The possibilities for growth and income in these expanding businesses is too great to ignore, especially if and when the market rebounds. I’ll be adding shares of both companies to my portfolio soon. 

Recession-proof UK stocks don’t exist

There’s no such thing as a recession-proof stock, but some stocks are more sensitive than others to the peaks and troughs — or booms and busts — of the business cycle. Cyclical stocks tend to follow the ups and downs in an economy. When a recession hits, cyclical shares tend to perform poorly and fall in price. On the other hand, defensive stocks are less affected by the economy. There are also sensitive stocks that fall somewhere in between. 

Defensive stocks can be found in the following sectors:

• Consumer defensive
• Healthcare
• Utilities

There are hundreds, if not thousands, of UK stocks in the consumer defensive, healthcare, and utility sectors. I can’t buy them all but I could look for a fund that invests in these sectors. Yet I would prefer to pick my own stocks. So I need something to help me select companies with a recession in mind. That something is quality.

Quality UK stocks

Quality stocks tend to have higher margins, profitability, and cash flow than their peers. Strong balance sheets and stable or improved business operations are also hallmarks of quality stocks. These features are sought after by investors when a recession is looming and during one. In my opinion, quality is never out of fashion.

Key quality measures

Two stocks have caught my eye for quality and defensive sector membership: healthcare stock Bioventix and AG Barr from consumer defensives. One quality non-defensive sector name also struck me as worthwhile. Given that I was looking for stocks to add to my stocks and shares ISA for a recession, this company’s business model had immediate appeal. That stock was FTSE 100 member Experian. The company owns a database of millions of consumers’ and businesses’ credit activity and repayment histories. It sounds like the sort of outfit that might see demand for its services holding up when the economy sours.

Taking stock of recession risks

I’m intrigued by these three stocks. They look good on measures of quality. Two are from defensive sectors, and one has a business model that seems like it should hold up well in a recession. So, do I buy these three UK stocks for my Stocks and Shares ISA? Not without further research.

Although consumers will likely cut spending on food and beverages less severely than on, say, eating out and cinema visits during a recession, will they switch from AG Barr’s brands to cheaper alternatives?

Bioventrix makes antibodies for diagnostic procedures and drug and compound detection. I want to know what proportion of its sales goes to organisations less likely to cut spending dramatically in a recession (like, for example, the NHS).

For Experian, although checking credit seems to make sense when times are tough, in a prolonged and severe recession, would reduced spending render its services redundant? These are some questions I must mull over before pulling the trigger on any of these three UK stocks. 

The stocks in question are Diploma (LSE:DPLM) and Experian (LSE:EXPN). I don’t own Diploma shares yet, but I do own Experian. Here’s why I’m looking to add one to my portfolio and increase my investment in the other.

Recession

It looks to me as though the UK is heading for a recession. Energy costs are rising, inflation is high, and the Bank of England’s best attempts at stemming the tide don’t seem to be working. 

As a result, I’m expecting things to get worse before they get better and looking to be cautious in my investing at the moment. For me, that means two things. 

First, it involves focusing even more carefully than usual on high-quality businesses when I’m looking for stocks to buy. In an unhelpful macroeconomic environment, I don’t want to be taking unnecessary risks.

Second, it involves being especially conservative in valuing stocks. That means being realistic in estimating what the underlying businesses will produce in the future and working out how much I’m prepared to pay accordingly. 

Quality

At first sight, it’s hard to see how Diploma and Experian fit the bill. Both of the stocks look like they have optimistic growth assumptions built in.

Diploma currently trades at a price-to-earnings (P/E) ratio of around 41. Experian looks a bit more reasonable at 24 times earnings, but it still looks risky.

Beneath the surface, though, there’s a lot more going on. Both companies have exceptional cash conversion ratios and I think this makes them attractive stocks at current prices.

Diploma converts just over 92.5% of its operating income to free cash. Experian is even better – over 94% of its operating income becomes free cash flow.

This is extremely impressive. For context, both of these numbers are more impressive than Alphabet (84%), Apple (89%), and Meta Platforms (91%).

According to Warren Buffett, the value of a business is a function of the cash it will produce. And I think that both Diploma and Experian generate enough cash to offset the risk implicit in their respective P/E ratios.

Valuations

With interest rates forecast to reach 4% next year, I’m looking for an expected return of 7% per year from a stock investment. 

For Diploma to achieve this, its earnings per share need to increase by around 15% annually. That seems like a lot, but I think that the company has a lot of opportunities ahead of it and a management team that is able to take advantage of them in intelligent ways.

In the case of Experian, the business needs to grow at an average of 12% annually for the next decade. Since it’s been growing at closer to 15% over the last 10 years, I believe that this is achievable.

That’s why I think that both Diploma and Experian are strong buy stocks for me at the moment. I’d be happy adding shares of either to my portfolio at today’s prices.

The stock is down 9% compared to where it was a year ago. But I think that the underlying business is one to own for the next decade. 

I own Experian shares in my portfolio. At a price-to-earnings (P/E) ratio of 28, there’s a risk the stock is over-valued.

Nevertheless, I think that the quality of the business justifies the price tag. Here are five reasons why I’d be happy to buy Experian shares today.

An indispensable business

The most important feature of Experian’s business, in my view, is that it provides an indispensable service. There are two reasons for this. 

First, an Experian credit report is a requirement for the majority of US mortgages. This gives the company’s earnings a high degree of stability.

Second, the cost of a credit report to a bank is negligible compared to the risk it offsets. On average, a credit report costs around 0.1% of the value of a mortgage.

To me, this means that Experian’s core business is likely to be doing well a decade from now. 

Limited competition

Experian operates in an industry with limited competition.  It’s not the only credit bureau, but I don’t think that there is any significant threat of disruption.

Equifax and TransUnion also offer similar products. But the competition doesn’t, as far as I can see, threaten Experian’s business.

The low cost of credit reports as a percentage of a mortgage means that banks typically want all three reports. And even if they don’t, all three are a requirement for US mortgages.

All of this means that I think that Experian is well-protected from its competitors.

Strong margins

Experian’s advantages result in a business that has impressive financial metrics. 

Last year, Experian used $400m in fixed assets and generated $1.37bn in operating income. That’s a 330% return, which I think is impressive. 

By comparison, Apple generates a return of 303%, Alphabet achieves 75%, and Meta Platforms manages 63%. In other words, the FTSE 100 stock generates cash more efficiently than some of the best big tech companies around.

Barriers to entry

An attractive business is likely to attract competition, which presents a risk to shareholders. But Experian’s business is well-protected from disruption.

The company’s database is an asset that is hard to replicate. It covers around 1.2bn people and around 145m businesses.

Its size is one issue but there’s also an issue of where it comes from. Experian’s data comes from various financial institutions that a new operation would find hard to match.

I therefore think that Experian’s attractive business metrics are well protected from disruption.

Growth opportunities

The risk with Experian’s business is that demand might slow down as rising interest rates result in fewer mortgage applications. But in my view this is a short-term issue.

Moreover, even if mortgage demand in the US does slow, I think that the company has some attractive growth opportunities to offset this.

Experian has been establishing a dominant position in Latin America, most notably Brazil. This, in my view, should help earnings continue to move forwards even in a slow US market.

Right now, there are four UK stocks on my radar. With a spare £500, I’d look to divide it into four lots of £125 and invest equally into each of them.

Experian

Top of my list is Experian. I think that this is a business straight out of the Warren Buffett playbook for investing.

Experian operates in an industry with limited competition. Its credit reports are a vital tool for lenders in evaluating the creditworthiness of borrowers.

The company’s business has high barriers to entry. It builds its reports by drawing on a huge database, which is nearly impossible to replicate.

Rising interest rates might slow the business down in the near future. But I think that this is going to provide me with an opportunity to buy shares at attractive prices.

Diploma

I’m also looking at Diploma shares. This isn’t a stock that gets much attention, but I think it could be a great investment for me.

Diploma is a collection of smaller businesses that focuses on the distribution of industrial components. It concentrates on niche markets, which helps protect it from competitors.

As a result, the company achieves huge returns on its fixed assets. Its most recent financial statements indicate that it generated £116m using £80m in property, plant, and equipment.

The stock is a little expensive at current prices. But the quality of the overall company should, I think, prevail over time.

Rightmove

I already own shares in Rightmove, but I’d buy more of them today if I had a spare £500. The company owns the UK’s largest property platform.

The platform’s size provides Rightmove with a huge competitive advantage. It generates roughly twice as many visits per month as its nearest competitor.

More visitors makes the platform a more attractive place for vendors to advertise. This attracts even more viewers.

A slowing property market might dampen interest in Rightmove’s services. But I don’t think that the slowdown in UK housing is likely to be enduring.

Endeavour Mining

Lastly, I’d buy shares in the Endeavour Mining. The company is a gold mining business with some of the lowest costs of production anywhere in the world.

The stock is 6% higher than it was a year ago. But I think that it’s trading at an attractive price nonetheless. 

Gold prices are likely to be volatile over time. And this provides an element of risk with this type of investment – the company’s profitability is likely to fluctuate.

In my view, though, the company’s low production costs should mean that its business proves durable. That’s why I’d invest £125 of a spare £500 in shares of Endeavour Mining today.