If you assume the stock market will continue to yo-yo, there are two options for the average investor. Either cash in and wait this volatility out, or buckle down, find some quality buys with good cash flows, and be ahead of the game when the markets turn.
Some people simply can't stomach these roller coaster markets. But those who can will find some quality buys out there, says Murray Leith, director of investment research at Odlum Brown.
"Investors are so worried about Europe, the banking system, and the global economy by extension, that they overlook the fact that many great businesses are still doing well, despite the tough economic environment," he wrote in a note to investors.
"There is no doubt that the world faces some serious challenges. However, we do not believe that these challenges are insurmountable; nor do we think they will prevent strong companies from prospering."
Because Mr. Leith thinks the economic recovery will continue, but very slowly, there is reason to buy quality companies. His views hold some weight, too. His model portfolio has been on par or beat the S&P/TSX Total Return Index and the S&P 500 Total Return Index for pretty much every time period since 1994.
To be worthy of a buy, Mr. Leith believes companies need to have above-average cash flows and profitability, strong balance sheets with lots of cash and strong earnings per share growth.
Aside from the typical stars like Apple and Google, the companies that fit this criteria include Coca-Cola, Colgate-Palmolive and Syntel. The first two have increased their sales by 40 per cent of more since 2006 and their EPS growth has been north of 63 per cent over the five years. As for Syntel, a technology outsourcing firm based in the U.S., EPS has grown by 130 per cent since 2006 and its employee base has increased by three times.
Then there are firms like Wal-Mart and food-service distributor Sysco. Much like Coca-Cola, Wal-Mart has expanded heavily overseas and Sysco has boosted margins by investing in the business to become more efficient.
In Canada, Mr. Leith targets firms such as BCE Inc., Intact Financial Corp. and CN Rail.
The common theme here is that these are all big firms with substantial histories. But be careful with the U.S. names. While the stocks themselves may be good investments, keep in mind that the Canadian dollar has been moving against the U.S. dollar when stock markets go up, and vice versa when the go down, so your return could be hedged.