To say we live in uncertain times is possibly the greatest understatement of the year so far. The market is rocking back and forth from peaks to troughs in response to rapidly-changing world events. If the share market were to drop again by, say, 10% then I would be looking at these shares to buy for my portfolio.

Second chance value shares

For me, a value share is a good company that is underappreciated by the investing community. Moreover, when crashes happen good companies often get trampled in the rush for the exits. In March there were dozens of good companies selling at great prices. 

Fortescue Metals Group Limited (ASX: FMG) is one of the shares I bought heavily during the ASX trough. I think it is undervalued even today. However, if I can get it cheaper I will try to do that. I am happy to wait to see if it is going to dip again before the economy starts to normalise. Fortescue is selling at a reasonable price to earnings ratio (P/E) of around 6.

Another great value ‘buy’ if the market falls would be Wesfarmers Ltd (ASX: WES). I do not own this share at the moment but I would buy in if the price were to fall by a reasonable amount. I like what this company is doing to reduce poor-performing retail outlets. Recent work to release capital and closing down smaller stores took courage. Also, and most importantly, Wesfarmers has an online asset that is a direct competitor to Kogan.com Ltd (ASX: KGN).

Great growth shares to buy

Of course, everyone wants the chance to buy into Afterpay Ltd (ASX: APT) if the share price lowers again. Personally, though, I think this is pretty unlikely. For me, I would be very interested in investing in EML Payments Ltd (ASX: EML) if the price was to lower to a more reasonable level. Currently, it has a P/E of 102 which indicates the market thinks it will earn a lot in the near future. For me, this seems a little high.

Zip Co Ltd (ASX: Z1P) has nearly doubled in the past month. It now has a market capitalisation of $2.39 billion versus the Afterpay market cap of $15 billion. At best this company has to increase its value 6 times, which I do not believe it’s likely to. I would buy into Zip Co if it reduced its market cap by 25 – 50%. Given the tenuous nature of the market and of these new buy now pay later shares, I think that is a possibility.

Foolish takeaway

There is a lot of value on the share market today, and a lot more opportunity if it were to fall again in the near future. One of the keys to investing is to be patient. Another important discipline is to not get worked up if you ‘miss out’ on an opportunity. There will be others, and there is always something you can do to grow your capital. 

More reading

• Consider these blue chip ASX shares for strong dividend yields
• How to turn $20,000 into $250,000 in 10 years with ASX shares
• How to become a millionaire in 25 years with $20 a day
• These were the worst performers on the ASX 200 last week
• Australian retail sales up 16.3% in May

Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO and Wesfarmers Limited. The Motley Fool Australia has recommended Emerchants Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Which shares to buy if the ASX tumbles appeared first on Motley Fool Australia.

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If you’re planning to add some dividend shares to your portfolio next week, then the ones listed below could be worth considering.

Here’s why I think they are top options for income investors right now:

BHP Group Ltd (ASX: BHP)

If you don’t mind investing in the mining sector, then you might want to consider buying BHP. I think it is a great dividend option right now due to its generous yield and positive outlook. Thanks to its world class operations and their low costs, I believe BHP is well-positioned to continue generating high levels of free cash flow over the coming years. Especially with iron ore at such strong prices.

And given the strength of its balance sheet, I suspect the majority of its free cash flow will be distributed to shareholders through dividends. In light of this, I estimate that the mining giant’s shares currently provide investors with a fully franked ~5% FY 2021 dividend yield.

National Australia Bank Ltd (ASX: NAB)

Another option for investors to consider buying for dividends is NAB. The banking giant’s shares have fallen heavily this year due to concerns over a potential spike in bad debts because of the pandemic. While I feel a rise in bad debts is inevitable, I’m optimistic the provisions it has made are more than enough to cover the potential damage.

In light of this, I feel the worst is behind the bank and now would be a good time to consider a long term investment in its shares. Especially for income investors in this low interest rate environment. At present, I estimate that NAB’s shares offer a generous fully franked 5.2% FY 2021 dividend yield. This is materially better than the interest rates offered with its term deposits and savings accounts.

More reading

• Consider these blue chip ASX shares for strong dividend yields
• These were the best performers on the ASX 200 last week
• Short-sellers are stepping up their attack against these popular ASX shares
• ASX 200 up again, ASX retailers make big gains
• The ASX big bank stock with the best forecast dividend yield for the new year

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 2 blue chip ASX 200 dividend shares to buy next week appeared first on Motley Fool Australia.

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The price/earnings (p/e) ratio is one of the most commonly used investing metrics.

There are lots of different ways to evaluate shares. You can look at the share price, the market capitalisation, the net profit, the dividend yield, the net tangible assets (NTA), the return on equity (ROE), the (free) cashflow and so on.

Different sized shares make different amounts of profit. How are you supposed to decide whether Commonwealth Bank of Australia (ASX: CBA) or Telstra Corporation Ltd (ASX: TLS) is cheaper?

The price/earnings ratio allows investors to try to compare different businesses based on how expensive they are compared to their earnings, even if they’re from different industries and there are big market capitalisation differences.

How the price/earnings ratio works

The price/earnings ratio will tell you what multiple the current share price is compared to the earnings.

I’ll try to give you an easy example so you can get your head around it. Imagine there’s a café or shop that makes $100,000 of profit a year after paying for all expenses and costs. How much would you buy that business for? Assuming the business is going to be profitable for the foreseeable future, you’d probably pay more than $100,000. If you’d be willing to pay $300,000 then the business would have a price/earnings ratio of 3.

If that shop had lots of growth potential then perhaps you’d be willing to pay $500,000 or maybe even $1 million. That would be a p/e ratio of 5 or 10.

With big ASX shares like Telstra or Macquarie Group Ltd (ASX: COH), you can do the same sort of calculation. For example, in FY20 Macquarie made $7.645 of diluted earnings per share and it currently has a share price of $122, which translates to a price/earnings ratio of 16. This could also be described as 16x FY20’s earnings.

How to compensate for faster-growing businesses

It starts getting tricky when you try to factor in the growth of a business. You could have one business with a FY20 p/e ratio of 20 and another with a FY20 p/e ratio of 30. One looks a lot more expensive than the other on this year’s earnings.

But what if the second business is projected to double its profit in FY21 and the first doesn’t grow profit at all? Compared to FY21’s future earnings, the first business has a forward p/e ratio of 20 and the second has a forward p/e ratio of 15. The second business now looks cheaper.

If a business is growing at a good pace then you need to think about the estimated earnings of future years, not just the current year.

The positives of using the price/earnings ratio

I like how universal the p/e ratio can be. You can use it to compare a $100 billion giant and a small $100 million company.

The price/earnings ratio is easy to calculate. All you need is the share price and the earnings, which is available in the annual report. For future earnings you’ll have to find an earnings projection or do some estimates yourself, which can be tricky.

Investors should focus on (long-term) profitability, so it’s good to look at a metric that compares profitability of different shares.

The negatives

However, the p/e ratio can be simplistic at times in my opinion.

The accounting profit, and therefore the p/e ratio, can give an impression of excessive profitability. Depreciation is one of the worst types of expenses, the money goes out of the door whilst the deduction takes several years to be fully recognised. Some businesses may end up (legitimately) spreading out the cost of depreciation, which boosts near-term profit. There are some businesses that just fully expense things upfront in their accounts – I respect these companies.

Also, with some businesses you may see revenue recognised quite a long time before the cash is actually received into the bank. There are risks with this. It’s important to look at the ongoing cash conversion. Indeed, some investors just prefer to look at the operating cashflow or the free cashflow rather than the accounting profit.

If you just focus on the p/e ratio you may miss cash generative businesses. Some businesses like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) have high annual non-cash costs like depreciation. If you focus on just the profit then you may miss how much annual cash they (normally) produce which can be distributed to shareholders.

The price/earnings ratio doesn’t work well for loss-making businesses – there’s no ‘p’ because there isn’t any profit yet. Avoiding loss-making businesses could mean missing out on a lot of future capital gains. Businesses like Pushpay Holdings Ltd (ASX: PPH) just needed to reach a certain scale before they show very attractive levels of profitability.

Foolish takeaway

I think the price/earnings ratio is a useful metric that can be used to quickly look at most businesses. However, there are some situations where it’s not the best metric to use. It’s also important to understand the relationship between the profit and cashflow for each business. I like to use the forward p/e ratio to assess the valuation of growth shares. 

More reading

• Consider these blue chip ASX shares for strong dividend yields
• How to become a millionaire in 25 years with $20 a day
• ASX 200 up again, ASX retailers make big gains
• The ASX big bank stock with the best forecast dividend yield for the new year
• Brokers just upgraded these ASX 200 stocks to “buy” today

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited, PUSHPAY FPO NZX, and Telstra Limited. The Motley Fool Australia owns shares of Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post What is the price/earnings (p/e) ratio? appeared first on Motley Fool Australia.

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