3 Quality Stocks to Buy During a Market Pullback

It seems that the stock market is starting to pull back. We are seeing weakness in the broader stock market averages that is magnified in some of the higher-risk areas such as technology, small caps, and industrials. This suggests that we are entering a risk-averse time period, and investors should brace themselves for a decline in the stock market.

While this decline, like with any other, will be accompanied by bad news, you should ignore this and get ready to buy high-quality stocks. When deciding what to buy on a pullback, make sure that you pick high-quality companies that generate strong, consistent cash flow. Also make sure you pick companies that have secular tailwinds, meaning that there are forces in the economy that aren’t cyclical that are benefitting these companies longer-term.

You may not pick the bottom, and this can be nerve racking. But if you are disciplined and choose your stocks and price points wisely, you will make some quality long-term market moves that will make you money. With that being said, I think investors should consider picking up shares in the following three companies in the event of a market pullback.

Source: Thinkstock

1. Exxon Mobil (NYSE:XOM)

Exxon Mobil looks like it can roll over and trade below $100 per share again down to its 200-day moving average at about $96 per share, and possibly a couple of dollars lower. But this is a pullback that I want to buy. Exxon Mobil has been creating shareholder value for decades. It generates consistent cash flow and pays a 2.7 percent dividend that management increases every single year. The company is selective in its investments, and as a result has the highest return on invested capital in the industry. Money it doesn’t invest or pay out in the form of a dividend is used to repurchase shares, so that over time, each share represents a larger part of the company.

Exxon Mobil provides essential products to consumers: oil and gas. Global demand for these products has been rising, especially in emerging markets, and Exxon Mobil is well positioned to benefit. In fact, one of the company’s most recent investments was in Vietnam, which is a rapidly growing market — shares of the Market Vectors Vietnam ETF are up 14 percent this year. Going forward, Exxon Mobil won’t make you fast cash, but it is the tortoise that beats the hare, and it is a stock to own whenever it is down.

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2. Visa (NYSE:V)

Visa is another excellent company that looks like it can pull back to below $200 per share. If it does pull back this far, you should consider buying some and hope it pulls back even further so that you can buy more. Visa is a phenomenal business that has robust, stable margins, growing sales, and exposure to one of the great secular trends of our time: the switch from cash to cashless payments, which is taking the world by storm. This trend is so strong that I am confident that even in a global recession, Visa can grow its earnings.

Unfortunately, I’m not the only one who has seen the potential here, and as a result, the shares are somewhat pricy. They trade with a price-to-earnings multiple in the low 20s. This may be a fair price to pay considering the strong, stable growth potential, but I’m looking to get the stock at a bargain, and I want to wait before I buy more. As I said, the stock can trade down to $200 per share, although if the market falls more significantly, I would be looking to add to my Visa position at around $180 per share.

Source: Thinkstock

3. Union Pacific (NYSE:UNP)

Union Pacific is the fastest-growing large railroad in the United States, and unfortunately, it is priced to grow. Rail transport is a phenomenal business because it is energy efficient and uses far less labor than trucks or planes. This has led to a phenomenal bull market in Union Pacific and its peers over the past 10 to 15 years. Union Pacific has some especially appealing qualities, such as exposure to America’s growing agriculture and oil markets, while it doesn’t have the coal exposure that some of its East Coast competitors have suffered with.

As a result, the shares have pretty much moved up in a straight line, and for those who missed the boat, a pullback would be welcome. Investors who don’t mind taking some risk can buy in the low $90 range, but I think that a broader market pullback could send these shares falling rapidly, considering that Union Pacific is a transport and an industrial, and these are sectors that investors hate when they are risk averse. With this in mind, I would want to be more patient with this stock and wait for a 15 to 20 percent pullback. While it seems unlikely now, I would be a welcome buyer in the low $80 range.

Disclosure: Ben Kramer-Miller is long Exxon Mobil and Visa.

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