Best Stocks To Buy Now

Many of the world’s most widely followed stock indices—including US benchmarks like the S&P 500 and Nasdaq, the Euro Stoxx 50, and Japan’s Nikkei hit record highs earlier this year on the back of broad gains in technology stocks and hopes of interest rate cuts by central banks.

Companies have also managed to generate better profits thanks to price increases in the current inflationary environment, helping lift share values further.

There was some pull-back in April, but by mid-year, the ASX was looking up. On July 15, Australia’s ASX200 rose 9% to breach 8000—an historic moment—on the back of hopes that the US Federal Reserve could start cutting rates. It comes as Dow Jones also breached the 40,000 watermark, and the S&P 500 notched up fresh highs. On August 1, the local bourse finished at 8114.70 points.

As the Australian Financial Review noted, it has taken the local bourse more than three years to climb past 8000 points after just passing the 7000 level in April 2021, back when governments and central banks were attempting to stimulate the economy during the pandemic.

Nevertheless, the run of gains was interrupted by a burst of volatility on August 5 and 6, when the ASX dropped 3.7%, and shed $100 billion in one day, in response to US jobs data and recession fears. Few companies traded in the black during this period, although Bitcoin was hardest hit—down 16%. Banks CBA, Macquarie and  QBE were all down by around 5%. By week’s end, stock markets here and overseas had stabilised, and the benchmark S&P/ASX200 index finished the week 1.25% higher at 7,777.7.

Note: The below list represents a selection of our top category picks, as chosen by Forbes Advisor Australia’s editors and journalists. The information provided is purely factual and is not intended to imply any recommendation, opinion, or advice about a financial product. Not every product or provider in the marketplace has been reviewed, and the list below is not intended to be exhaustive nor replace your own research or independent financial advice.

Investment research house Morningstar compiles a popular monthly list of best stock ideas based on undervalued (rather than cheap) stocks, after screening them on several parameters to ensure high quality. Some of the companies featured in its latest report include:

While investors have a variety of local companies and sectors to choose from, the Australian market represents less than 2% of global equities by market value. Investing overseas can open up a much bigger range of choices, helping investors reduce risks and improve prospects for returns.

According to Morningstar, some of the most promising global equity stocks include:

Albemarle: Shares of the specialty chemicals giant have been sold off since the beginning of 2024 when lithium spot prices have crashed as battery makers reduced inventory levels. However, this was seen as an opportunity for investors to pick up shares of this high-quality lithium producer, whose cost advantage stems from its unique geologically advantageous resources. Lithium prices are expected to rise as demand grows and the market returns to undersupply conditions.

Baxter International:  The medical instruments and supplies company had a rough 2022, when supply chain issues and uncertainty stalled Baxter’s growth. However,  Morningstar thinks that Baxter will resume growing its dividend in line with earnings, adding that “the dividend stock looks cheap, trading 49% below our $67 fair value estimate”.

FMC: Crop producer FMC has grown to become one of the five largest patented crop protection companies, largely through its acquisitions.  Morningstar cites its healthy cash flows, noting it also trades 46% below their $110 fair value estimate, however, the research house also adds: “While we think that the firm’s distributions are appropriate and that the company will generate sufficient cash flows to maintain its dividend, FMC faces moderate cyclicality risk and carries elevated leverage on the books as chemical crop demand is just beginning to recover from a cyclical bottom…”

Sirius XM Holdings: There is plenty to like about entertainment group, Sirius XM Holdings: the company trades 45% under Morningstar’s fair value estimate and its board issued a special dividend in 2022 because of company outperformance—although this is not expected to be repeated any time soon. First-quarter results were strong, and management is “pursuing a strategy for technology and content investment to drive growth”.

Polaris: Wide-moat power sports manufacturer, Polaris, had a disappointing first quarter earnings for 2024, but Morningstar remain bullish about the company, citing strong cash flow over the next five years. Dividend increases, averaging a 33% payout ratio over the next decade, are also tipped to continue.

Picking stocks is no doubt an intimidating prospect given that every major share market has thousands of stocks to choose from. There is no foolproof process that suits every investor because what is best for you depends on your individual objectives, risk appetite, amount of capital available, and your investment time frame.

However, focusing on a few golden rules can ensure that investors reduce risks while making these decisions:

1. Research businesses: Good stock picking requires diligence and understanding of the business you will invest in. Look at different businesses to understand what they do, who are the people behind them, what is the company’s track record, the structure of the industry they operate in and so on. This can often open up different avenues to invest. For example, while it may be expensive to invest in an established multinational firm, it may be cheaper and often less riskier to invest in one of its key suppliers instead.

2. Identify undervaluation: During periods of market volatility, stocks often trade at a discount to their inherent value due to cyclical or temporary factors. Look to identify companies that can potentially recover when some of these conditions change. This might involve sifting through all the beaten-down companies to find one that’s good quality. Once its margins return to average, you are bound to make a decent return.

3. Assess competitive advantage: Share valuations typically boil down to a few key drivers such as revenue growth, long-term margins, capital expenditure requirements and so on. It is important to evaluate companies on these fundamental factors to assess their competitive advantage. Generally, businesses with a strong competitive advantage can sustain high levels of profitability over time.

4. Understand risk factors: Investors need to be aware of risks and exposures that are associated with each of the individual stocks. For example, businesses with high levels of debt can be a problem, particularly if they also happen to be in a cyclical industry and have heavy cash requirements. This could also mean asking questions about when margins will recover, what the competitive landscape is like in the sector, or how a recession might impact the business.

5. Diversify risk: Once an investor has identified the various risk factors that affect individual businesses in their portfolio, they need to make sure these are diverse. For example, a number of sectors will be impacted by changes in the housing industry. This is particularly relevant to a top-heavy market like Australia where banks and miners make up nearly half of the index.

Investing in an index is considered a passive strategy since it does not involve any stock picking or active management.

However, indexing strategies tend to perform better than stock picking strategies. A study by S&P Global found that over a 15-year investment horizon, nearly 95% of fund managers failed to outperform the benchmark index. While passionate investors are often keen to dive into the market and bet on the odds of generating better returns than their peers, index investing has become a more viable alternative for retail investors, particularly with the growth of index funds and exchange traded funds (ETFs) in recents years.

Experts say the best alternative for you will depend on your time commitment and level of market knowledge.

Index investing is particularly helpful for people starting out on their investment journey. As they build up a portfolio as well as their market knowledge over time, they can then start to think about investing in individual stocks.

Buyer Beware

Most people invest in the stock market with the aim of generating wealth, but it’s important to remember that stocks are one of the most risky types of investments. If a company doesn’t do well or falls out of favour with investors, its stock price can decline and investors could lose money. Entire indices can also fall sharply, as we saw with the ASX in early August which lost close to 4% of its value in a couple of days.

Nobody knows for certain how the market will perform in the near term, and often businesses are affected by factors beyond their control. For example, central banks globally  lifted interest rates over the past two year, resulting in underperformance by high-growth as well as interest rate sensitive stocks.

If you decide to invest in stocks it should be based on your individual objective, time horizon and risk appetite. It’s also wise to ensure you have a few months’ worth of savings stashed away so that you can handle any unexpected expense without having to touch your investments.