Market dips can create fear for investors, but they can present opportunities for investors who know where to look.
As legendary investor, John Templeton, once said, “The time of maximum pessimism is the best time to buy.”
In this article, we’ll look at how to find the best stocks to buy when the market dips, and the mindset that might help you make better investments during times of uncertainty.
Table of Contents:
- What to Look for in Stocks During a Market Dip
- 5 Core Types of Stocks to Buy in a Market Downturn
- Mistakes to Avoid When Buying on the Dip
- Build Your Watchlist Before the Dip
- Long-Term Mindset
Let’s dive in!
What to Look for in Stocks During a Market Dip
You don’t need to predict the market’s bottom to invest well during a downturn.
You just need to focus on companies that have the financial strength to survive and the earnings power to thrive when the economy recovers.
Here are a few traits you could prioritize when you’re looking for companies:
- Strong balance sheet: Look for companies with low debt, high cash reserves, and positive cash flow. Costco (COST) is a great example. Its fortress balance sheet helps it weather economic slowdowns while continuing to invest in growth.
- Durable competitive advantages: Companies with economic moats, whether through cost advantages, brand, network effects, switching costs, or economies of scale, tend to be higher quality businesses and may recover faster in a market downturn.
- Example: Visa (V) benefits from network effects around its global payment infrastructure and high-margin processing.
- Consistent earnings and pricing power: In downturns, stable earnings tend to matter more than companies with explosive growth. That means that companies like Procter & Gamble (PG) might recover sooner because their products will stay in demand no matter what.
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5 Core Types of Stocks to Buy in a Market Downturn
Not every stock deserves your attention during a dip.
Here are five categories of businesses that might make for excellent stocks to buy during a market downturn:
1. Defensive Stocks
These are companies that sell essential goods that tend to see steady sales, regardless of the economy.
People still need necessities like soap, food, and medicine even during recessions.
Examples:
- Procter & Gamble (PG): PG generates reliable cash flow as a staple in consumer good, through products like Tide, Gillette, and Pampers.
- Walmart (WMT): As consumers look to reduce their spending when money’s tight due to economic slowdowns, Walmart often sees increased store traffic.
2. Dividend Stocks
Dividend-paying stocks can offer stability and dividend income during downturns.
The best ones have a long track record of maintaining or increasing dividends.
- Coca-Cola (KO): With over 60 years of dividend growth, Coca-Cola’s global distribution and brand strength help it navigate tough cycles.
- Realty Income (O): Known as “The Monthly Dividend Company,” this REIT owns high-quality retail properties and has a long record of dividend payments.
3. High-Quality Tech Stocks
Some tech companies have strong balance sheets, high margins, and sticky customer bases.
Even though these high-growth businesses might not always fare the best in a recession, these are often some of the highest-quality companies available and are probably more durable than people assume.
- Microsoft (MSFT): The combination of enterprise software and cloud computing creates recurring revenue with room to grow.
- Apple (AAPL): Its ecosystem of products and services generates massive cash flow and customer loyalty.
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4. Undervalued Growth Stocks
Some growth companies get punished too harshly during market selloffs, even if their long-term story remains intact.
These are often the stocks that can see the biggest rebounds once sentiment improves, but that might take a longer time.
- Meta Platforms (META): After falling sharply in 2022, Meta cut costs, refocused on profitability, and saw its stock recover as advertising trends stabilized.
- Adobe (ADBE): A leader in creative software, Adobe has strong pricing power, high margins, and a subscription-based model that keeps revenue flowing even in choppy markets.
The key is to separate the truly broken businesses from the temporarily beaten-down ones.
It’s important to remember that when a good business gets cheaper, it becomes more attractive, not riskier.
5. ETFs and Index Funds
If you’re unsure which individual stocks to buy, diversified ETFs let you gain exposure to entire sectors or the broad market at discounted prices.
Burton Malkiel’s book A Random Walk Down Wall Street argues that most financial advisors and individual investors fail to beat the market, so it might be worth investing in diversified index funds.
- SPDR S&P 500 ETF (SPY): This fund tracks the S&P 500, giving you instant access to 500 of the largest U.S. companies.
- Vanguard Total Stock Market ETF (VTI): VTI holds thousands of U.S. stocks across all market caps, offering wide exposure and a long-term growth profile.
ETFs work especially well when fear dominates the market. Instead of trying to pick the bottom for a single stock, you can own a broad slice of the market at a better valuation.
Mistakes to Avoid When Buying on the Dip
Buying during a downturn can lead to some of the best returns, but there are still some mistakes to watch out for.
Here are some mistakes that sometimes trip up even seasoned investors:
- Selling too soon after a bounce: Some investors like to sell once they’re “back to breakeven.” That mindset often leads to missed gains when stocks continue recovering beyond their previous highs. As Peter Lynch said, “You won’t improve [investment] results by pulling out the flowers and watering the weeds.”
- Catching falling knives/value traps: Just because a stock is down 50% doesn’t mean it can’t fall another 50%. An easy way to avoid value traps is to look for companies that are increasing the intrinsic value of the shares. That generally means looking for companies reporting positive earnings and FCF, without dilutive sales of new shares.
- Ignoring business quality: A cheap stock isn’t always a good deal. It’s generally best to focus on businesses with long-term staying power, not just low valuations.
- Going all-in too early: It’s tempting to pour in cash at the first sign of a dip, but corrections can drag on. Therefore, if you’re concerned the market will keep going down, try dollar-cost averaging into a stock to build the position gradually.
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Build Your Watchlist Before the Dip
The best time to prepare for a downturn is before it happens.
When markets fall, emotions often run high, and it can be difficult even for experienced investors to stay level-headed.
Having a well-researched investment watchlist beforehand can help remove the guesswork and allow you to act decisively.
Identify companies with strong fundamentals that you’d be comfortable holding for years. Review their historical valuations, understand their business models, and track their financial health. When prices fall, you’ll know which stocks deserve your capital.
You can use tools like TIKR to streamline this process. You can value stocks to find an appropriate price you’d pay to own the stock, and then you’ll probably feel more confident to purchase more shares when the stock trades on sale.
Long-Term Mindset
The biggest gains tend to go to the investors who stay in the game the longest, not necessarily those that time the market perfectly.
Bear markets feel painful in the moment, but they often end up looking like small dips when you “zoom out” and look at the long-term chart.
If you stay invested in quality businesses, volatility becomes a temporary setback rather than a permanent loss.
FAQ Section:
What are the best stocks to buy when the market crashes?
The best stocks to buy during a market crash are typically those with strong balance sheets, stable cash flow, and a history of resilience, such as blue-chip stocks, dividend growers, and companies with long-term competitive advantages.
Should I wait for the market to hit the bottom before investing?
Waiting for the bottom rarely works because it’s very difficult to time the market. Instead, most long-term investors will see a greater benefit by consistently investing in high-quality stocks during market pullbacks, rather than attempting to time the exact low point.
Are ETFs a smart choice during a market dip?
Yes are a good investment for when the market dips. Broad-market ETFs such as SPY or VTI offer diversified exposure to hundreds or thousands of stocks, allowing investors to buy into the market at discounted valuations with lower individual company risk.
How can I tell if a stock is undervalued in a downturn?
Investors can tell if a stock is undervalued by looking at a company’s valuation metrics and omparing them to the company’s historical averages and industry peers to determine whether the stock looks undervalued.
Is investing during a recession a good idea?
Yes, it’s generally good for investors to buy during a recession. Many investors have built long-term wealth by purchasing quality businesses at attractive valuations during recessions. Companies with durable earnings and strong financials often recover well and outperform over time.
TIKR Takeaway
Market dips can create opportunities, to buy high-quality companies with strong balance sheets, consistent earnings, and long-term growth potential at a discount.
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks, so if you’re looking to find the best stocks to buy for your portfolio, you’ll want to use TIKR!
TIKR offers institutional-quality research for investors who think of buying stocks as buying a piece of a business.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
