To use a baseball analogy, one of the best parts about investing is that you can't strike out looking. No matter how many stocks you watch go by, and no matter how long you watch them, you don't lose money by waiting for a better opportunity to come around.
That makes building a watch list one of the most powerful things you can do as an investor. By doing the research in advance and deciding which companies you'd like to own if the price were right, you can better take advantage of the market when it throws its occasional fire sales. If you know in advance what you'd buy and at what price, you can act that much faster when the opportunity arises. With that in mind, here are three top stocks to consider buying if there is a market pullback.
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1. The largest company out there
Microsoft (MSFT -0.66%) currently holds the honor as the largest publicly traded company on the planet by market capitalization. It earned that slot through decades of strong results and a recent successful push into a subscription model to improve recurring revenue. As awesome as Microsoft is as a company, it is rapidly running into a problem caused by the law of large numbers.
Microsoft currently trades at more than 10 times its anticipated 2023 revenue and around 32 times its anticipated 2023 earnings. Those multiples may be appropriate for a quickly growing business, but it's a steep price to pay for an already giant company. Consider that Microsoft has to add around $2 billion in new annual revenue, without losing any of its existing sales, just to grow 1 percentage point.
It's not an impossible task -- indeed, Microsoft is expected to sustain growth even faster than that over the next few years -- but it's one that gets tougher with size.
Still, despite the challenges associated with its size, Microsoft has a lot going for it. Microsoft has a solid balance sheet (with more cash than debt on it), a strong market position, a decent anticipated growth rate, and the ability to continue to innovate even though it is already a huge company. Put it all together, and it looks like a business that might be worth buying shares of if the price were lower.
2. A business in a critical but out-of-favor industry
Whether you love it or hate it, oil and natural gas provide the largest source of energy in the United States, and that trend is expected to continue for decades into the future. That makes midstream energy companies like Kinder Morgan (KMI 0.40%) that focus on transporting that fuel from where it's produced to where it's processed and used very critical to our everyday lives.
Still, the move to greener energy is very real. While the need to move traditional energy sources around isn't going anywhere anytime soon, growth in that business will likely be harder to come by in the future. Kinder Morgan has already been affected by this as it was forced to sell the Trans Mountain pipeline to the Canadian government due to fights it was facing as it attempted to expand its capacity.
Kinder Morgan remains a titan in its industry, and now that it has cleaned up its balance sheet, it is a reliable cash flow generator with a comfortably supported dividend. Still, with a price-to-earnings ratio around 22, the market is pricing in growth that may be harder to achieve in the future than it has been in the past. As a result, it shows signs of being a great company where watching for a better price in its stock might be worth the wait.
3. A leading self-storage company whose shares have skyrocketed
Extra Space Storage (EXR 0.21%) is one of the largest companies in the self-storage business. That business is a wonderfully simple one where the company provides real estate, storage lockers, basic security, and maybe some climate control, and the customers get a space to store their stuff.
Self-storage tends to be a fairly "sticky" business -- consumers put their stuff in storage and then just keep paying the bill. That fairly reliable revenue stream combined with the straightforward nature of the business enables self-storage businesses like Extra Space Storage to generate decent amounts of cash.
Even better for investors, as Extra Space Storage is a real estate investment trust (REIT), it must pay out at least 90% of its earnings as a dividend to its shareholders. As a result, investors are well positioned to receive a large portion of the company's success.
It's in that dividend that the primary challenge new investors in Extra Space Storage face becomes clear. The company's current yield is a mere 2.5%, an artifact of the fact that its shares have just about doubled over the past year. The income per invested dollar Extra Space Storage offers to its investors has shrunk as its shares have risen, a result of the crazy low interest rates we're currently facing.
That means, as awesome a company as Extra Space Storage may be, it's tough to justify investing new money in its shares at the moment. Still, it's a great one to watch, and should the market offer its shares at a discounted price, it just might be a signal to make an investment.
Start now to set yourself up for future success
Even if current market valuations make it difficult to pull the trigger and actually buy shares, now is a great time to set up a watch list of businesses you'd love to own at the right price. After all, it's hard to tell when the market will crash, even if you can be pretty sure it will do so again at some time.
Have your watch list set up in advance. When the market offers you that price, it gets much easier to actually buy its shares when they're down. So get started now, and set yourself up to take action whenever it is that the market next offers you the chance.
