I’m always on the lookout for shares to buy to enhance my portfolio and generate wealth. And a stock market correction certainly heightens my interest. After all, we all want to buy our favourite stocks at knockdown prices.
So, let’s take a closer look at what we’re trying to achieve and two stocks that can get us there.
Buying the dip
Warren Buffett tells us we should be happy when share prices go down. That’s because it provides us with the opportunity to buy more of our favourite stocks at lower prices.
“Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price,” the legendary investor once said. He also contends that “net buyers” of stocks benefit when the stock market goes down.
So what we’re looking for is value. And it’s certainly easier to find value when share prices are going in reverse. I’m buying now for the recovery.
The correction
The recent correction has hit financial stocks more than most. But other parts of the market, including housing, retail, and utilities suffered too.
In hindsight, the correction appears to be built on panic. Following the Silicon Valley Bank fiasco, many investors suggested that other banks were sitting on billions of unrealised bond losses.
However, SVB was unique in that it served one sector — tech — and its bond holdings were relatively concentrated. While most banks will hold bonds through to maturity, SVB was forced to sell at a loss — this spooked the market.
For me, these events have created opportunity. After all, nothing material has changed, as this was a correction built on panic.
My two picks
Unsurprisingly, I’m picking two of the hardest hit stocks by the correction — both financial stocks.
Some stocks were hit harder than Legal & General. But down 6% over a month, the financial services giant now trades with a price-to-earnings of just 6.3 and offers investors a huge 8% yield.
The company performed well amid challenging conditions in 2022. Earnings per share was up 12%, while its solvency II coverage ratio rose to 236% from 187%.
Under solvency II, insurers need enough capital to have 99.5% confidence they could cope with the worst expected losses over a year.
So, it’s a secure stock, trading at half the index average — in terms of price-to-earnings — and offering a sizeable yield. It’s a solid, boring stock that I’ve bought more of.
Next, something a little more exciting. Standard Chartered has fallen 21% over the past month. It’s a bank focused on Asia and the Middle-East, and that means it trades at a premium to some UK-focused banks because these are fast-growing markets.
Very high interest rates are a concern for banks, because of higher impairment charges and slower loan book growth. But rates around the world are likely to fall this year to more beneficial levels.
With the stock trading at just 7.5 times earnings, and a potential takeover offer, I’ve topped up on this stock. In February, it was suggested that First Abu Dhabi Bank was considering a $35bn takeover of Standard Chartered — that’s way ahead of the current £17bn market cap.
