When there’s the kind of inventory market correction we just lately noticed on each side of the pond, some share costs can change quick. The markets have partly recovered, however there’s ongoing market turbulence that would probably worsen earlier than it will get higher. I see that as a chance to hunt for shares to purchase for my portfolio. However in doing so, I proceed to pay shut consideration to 3 potential indicators of a share’s high quality.

1. Enterprise resistance to an financial downturn

There are few companies which might be unscathed when the economic system immediately takes a pointy downwards flip (although there are some).

However an financial downturn doesn’t have an effect on all firms equally.

No matter goes on out there, demand for energy distribution will stay. That doesn’t imply a agency like Nationwide Grid will stay untouched. Market turbulence might drive up borrowing prices, for instance. Given the corporate’s giant debt pile, I see that as a danger.

However examine that to a homebuilder. When markets tank and the economic system is significantly struggling, the business outlook for builders typically plummets. It may possibly take years for them to get well – and a few by no means do.

2. Wholesome steadiness sheet and manageable capital wants

One other high quality indicator I think about is an organization’s steadiness sheet.

Going right into a troublesome interval, the extra onerous money an organization has the higher, in my view.

Right here I see a vital distinction. Many firms speak about their ‘liquidity’, which is the quantity of capital they’ve entry to.

But when issues go south and their lenders change their thoughts (or run out of cash themselves), how helpful is that liquidity? Being advised you may have a credit score settlement of a sure measurement doesn’t really assure entry to that cash when the economic system struggles and different debtors are all scrambling for money.

So when searching for shares to purchase, I think about an organization’s steadiness sheet however pay shut consideration to its money and money equivalents.

I additionally take note of its spending wants. Some companies can in the reduction of their spending necessities dramatically when the scenario requires it – however many can not.

3. Pricing energy

I additionally think about pricing energy.

Right here a cigarette firm like Imperial Manufacturers or British American Tobacco (LSE: BATS) is an effective instance.

Over time, cigarette gross sales look prone to decline and certainly I see that as an enormous danger for each firms. British American has made larger strides in growing its non-cigarette enterprise however the economics of that stay far much less engaging than cigarettes, for now.

However whereas cigarette gross sales are steadily declining, they haven’t collapsed. Recessions have come and gone, well being dangers have change into far clearer, social acceptance of smoking has shrunk – but giant numbers of people who smoke stay tobacco addicts and can proceed shopping for cigarettes even whereas producers push by means of giant price will increase.

That already provides British American quite a lot of pricing energy. It has much more pricing energy than some rivals as a result of it has developed a variety of premium manufacturers reminiscent of Fortunate Strike that accordingly can obtain a premium promoting price.

That explains why the corporate is a money technology machine. Like US rival Altria, has raised its dividend per share yearly for many years, by means of a number of financial storms and market crashes.