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If finding stocks to buy only meant identifying great companies, then investing would be a lot easier than it is. Unfortunately, price is important, and stocks in solid companies rarely sell for good prices.
However, the stock market is volatile and highly unpredictable. That means it pays to have a list of stocks to buy in the event of a liquidation, so you’re prepared when an opportunity presents itself.
quality actions
What makes a stock great for an investor to own? The answer boils down to two things.
First of all, the underlying business must be one that can generate a large amount of cash. This is what drives performance, making it an essential part of a great investment.
Second, there must be something that acts as a barrier to competitors. A business with large economic holdings is unlikely to continue to generate returns if it is easy for others to do the same.
With this in mind, here are two stocks that I think fit the bill. Both seem overpriced right now, but either could be great if bought at the right price.
Diageo
Diageo (LSE:DGE) is an alcoholic beverage company. In my opinion, your business is one of the strongest in the world. FTSE 100.
Diageo generates around £5bn in operating income using £6bn in fixed assets. This means that it ticks the first box: it generates good performance considering how much it costs to run.
Spirits can be a crowded market, so there is a risk that artisanal brands will gain market share. But the business has some important advantages that limit this threat.
First, Diageo has some top-tier brands. This gives the company bargaining power with retailers that smaller players don’t have.
Second, its scale gives it a huge advantage. It means lower marketing, distribution and manufacturing costs.
The stock is currently trading at a price-earnings (P/E) ratio of 23, which I think is a lot for a company growing revenue by 5%. However, in a market sell-off, you would be looking to buy it.
However, if the stock price were to drop sharply, things could be different. I think Costco would be a great stock to own, if only it were available at a substantially lower price.
costco
Another stock on my list is discount retail costco (NASDAQ: COST). At a P/E ratio of 36, this is well above the level I’d be interested in, but the underlying business looks great.
In general, retail companies do not usually make large investments. Low profit margins and fierce competition mean that inflation can be a significant risk.
This is the case with Costco. But revenue from company membership fees gives you a source of income that is not dependent on product margins.
This is what helps the retailer keep prices lower than other retailers. And those low prices continue to attract customers who are willing to pay the membership fee.
Basically, Costco’s two strengths reinforce each other. Customers pay to join because they know they will get low prices, and fee income allows the company to keep prices low.
The company’s business model is nearly impossible for a competitor to replicate due to its size. So I think it would be a great investment at a fair price.
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