2 top stocks to buy in a market sell-off

If finding stocks to buy just meant identifying great companies, then investing would be easier than it is today. Unfortunately, price matters, and stock in a strong business rarely sells for a good price.

However, the stock market is volatile and unpredictable. That means it’s worth having a list of shares to buy in the sell-off, to be ready when the opportunity arises.

Quality stocks

What makes a good stock for investors to own? The answer comes down to two things.

First of all, the basic business must be a business that can generate a lot of money. This is what drives returns, making it an important part of a great investment.

Second, there must be a barrier to competitors. A business with good economic properties would not be profitable if it were easy for others to do the same.

With that in mind, here are two stocks that I think fit the bill. Both look very expensive right now, but could be a good buy at the right price.

Diageo

Diageo (LSE:DGE) is an alcoholic beverages company. In the view, the business is one of the strongest in the FTSE 100.

Diageo generates around £5bn in operating income using £6bn in fixed assets. This means it ticks the first box – it generates a good return considering how much it costs to run.

Alcoholic beverages can be a crowded market, so there is a risk of artisanal brands taking market share. But businesses have some important advantages that limit this threat

First, Diageo has several first-rate brands. This gives companies negotiating power with retailers that smaller participants don’t have.

Second, scale provides a huge advantage. That means lower marketing, distribution, and manufacturing costs.

The stock is currently trading at a price-to-earnings ratio (P/E) of 23, which I think is a lot for a business that increases profits at 5%. But in the selling market, I want to buy.

If the stock price drops too much, it could be different. I think Costco would be a great stock to own, if only available at a fairly low price.

Costco

Another save on my list is discount retailers Costco (NASDAQ: COST). At a P/E ratio of 36, this is quite a bit higher than the level I would expect, but the underlying business looks very good.

In general, retail companies do not tend to make large investments. Low profit margins and fierce competition mean that inflation can be a significant risk.

This is actually from Costco. But the company’s membership fee revenue provides a source of income that does not depend on product boundaries.

This is what helps retailers keep their prices lower than other retailers. And those low prices continue to attract customers who are willing to pay the membership fee.

In truth, Costco’s two strengths reinforce each other. Customers pay to join because they know they will get lower prices and the fee income allows businesses to keep prices down.

The company’s business model is almost impossible for competitors to imitate because of its size. That’s why I think it would be a good investment at the right price.