So you’re dead set on buying stocks. Despite the warnings you read in my stock investment outlook, you still believe being an owner of publicly traded companies will benefit you in the long run. In the long run, you will be right. But expect a lot of turbulence coming up in the next year or two! In the meantime, you can select stocks that will outperform the stock market as a whole.
How can you outperform the stock market over the next year or two? To put it bluntly, you need to select stocks that will fall less than others. Find companies whose products will be in demand come hell or high water. Buy companies that sell consumer staples like groceries, basic clothing, tobacco products, and basic toiletries. Buy companies that provide healthcare products or services like prescription drugs, over the counter drugs, and hospital companies. Lastly, buy utility companies. When times get tough, consumers will not stop buying these products.
Exercise caution when selecting these stocks. Don’t get confused and buy restaurant stocks instead of grocery store stocks. Don’t buy Louis Vuitton stock (LVMUY) instead of something like Hanes Brands (HBI). Consumers will quickly stop eating out and buying luxury items when times get tough!
Stick to companies that have a low price to earnings (P/E) ratio. This will ensure that you are not over paying for the company. Buy companies that have low debt. If interest payments comprise a large part of the company’s expenses, they may not be able to make those payments if demand for their product falls! Lastly, buy companies that have a high return on equity (ROE). Return on equity tells how much money a company can make off of your investment in them. If you give a company $100 and they are able to turn that into $125, they have a ROE of 25%.
Lastly, use the tried and true method of comparing the stocks past performance to the stock market in times of trouble like 2008. For example, while the stock market was down about 50% in 2008, Walmart (WMT) actually posted a positive return!
Other companies that fit these descriptions include Johnson & Johnson (JNJ), Exxon Mobil (XOM), Mondelez International (MDLZ), Kroger (KR), and Southern Company (SO). Feel free to ask me if a stock you found can be expected to outperform in a coming market downturn. Leave a comment below!