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How to Take Advantage of Stock Market Dips

The Canadian and U.S. stock markets dipped more than 8% and nearly 10%, respectively, from their all-time highs. Market declines are nothing to fear. Instead, they should be viewed as buying opportunities.

However, for individual stock pickers, it’s not really about how much the market dips before you start jumping in. While the market falls, it might feel like catching a falling knife when you buy.

So, focus on the businesses you want to own. With the dip we’re experiencing, it’s a good time to review your watch list and determine the “buy” price ranges the stocks are good deals at.

I’ll use leaders in certain industries as examples.

Royal Bank of Canada

At about $99.20 per share, Royal Bank of Canada (TSX:RY)(NYSE:RY) trades at a price-to-earnings multiple of roughly 12.9. So, the stock is within fairly valued, even though it dipped about 8.5% from its recent high.

The consensus 12-month target from Thomson Reuters is $110 per share on the stock, which represents 10.8% upside potential. If you’re all right with getting that potential upside and the nearly 3.7% yield that the bank offers, then you might buy some shares here.

If you’re looking for a bigger margin of safety, you might require the stock to be at least 20% below Reuters’s mean target, which indicates a maximum buy price of $88 per share.

Enbridge

At about $43.40 per share, Enbridge Inc. (TSX:ENB)(NYSE:ENB) trades at a price-to-operating-cash-flow multiple of roughly 8.7. So, the stock is discounted.

If Enbridge executes well, it can recover nicely and deliver a double-digit rate of return of at least 14% in the next three to five years. A big portion of the returns will come from its dividend.

Enbridge offers a significant yield of nearly 6.2% currently. With a +20-year track record of growing dividends, largely contracted cash flow, and a sustainable payout ratio of 65%, the company should continue growing its dividend. Management currently aims for a dividend-growth rate of 10%. If the road gets bumpy, we may see lower dividend growth.

The consensus 12-month target from Reuters is $57.70 per share on the stock, which represents 33% upside potential. The stock is nearly 25% below the target price, so it’s a good place to buy some shares for value investors looking for income from a blue-chip name.

Investor takeaway

The market dip is a good reminder to review your watch list and update target buy prices, so you can take advantage of good deals when the price targets hit. Currently, Enbridge looks to be more of a bargain than Royal Bank.

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Fool contributor Kay Ng owns shares of Enbridge. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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