3 types of stocks to watch during a market selloff

Markets are reeling amid a cascade of worries, including Trump's tariffs, their potential ripple effects on the economy, and fears of a resurgence in inflation.

The S&P/ASX 200 managed a 3.2% rebound from March 13 to March 26, but the recovery faltered after Trump announced an additional 25% tariff on non-US-made cars, compounded by the jitters ahead of his "Liberation Day" reciprocal tariffs on April 2.

Today, the ASX 200 slid 1.53%, marking its third-worst session of 2025, though it remains 1.5% above the recent low set on March 13.

The S&P/ASX 200 is on the backfoot after a failed to push above the 20-day moving day average (red) | Source: TradingView

This downturn leaves investors at an uncomfortable juncture — too late to sell, yet too early to buy the dip. With weakness persisting and risks still unfolding, this is often the time to begin short-listing some stocks worth buying once the turmoil subsides. Here are three types of stocks to keep on your radar.

Cash backing

Companies with substantial cash reserves are worth watching, especially its market cap begins approaching the amount of cash on the balance sheet.

This scenario suggests the market is valuing the business at little to nothing beyond its cash pile, effectively pricing in minimal expectations for future growth or profitability. If the market overreacts and drives the share price too low, the downside risk is cushioned by that cash reserve.

This logic typically applies to profitable companies with solid fundamentals — not unprofitable companies from sectors like biotech or resources.

Take The Reject Shop (ASX: TRS) as an example, though its relevance has shifted since receiving a takeover offer last week at a 112% premium to its prior close. Even so, its key metrics illustrate why it’s the kind of stock worth eyeing during a market selloff.

TRS is poised for an earnings recovery, with FY25 tipped as a turnaround year for the struggling discount retailer. Its recent 1H25 results showed sales climbing 2.9% to $471.7 million, net profit after tax rising 10.1% to $15.9 million, and an interim dividend increasing 20% to 12 cents per share.

The company’s balance sheet stands out, with $75 million in cash and no drawn debt — a significant figure relative to its pre-takeover market cap of $115 million. It was also carrying $143.1 million in inventory as of December 2024, so the cash and asset backing is very substantial.

The half-year result also provided a trading update, noting sales for the first seven weeks of 2H25 grew 3..6% year-on-year, with gross profit margins also ticking higher.

Earnings beats

Which companies stood out with the strongest earnings beats last reporting season?

When a company beats analyst earnings expectations, it's a clear sign of momentum for the broader business, driven by factors like stronger-than-expected customer demand, operational efficiency and savvy dealmaking.

Over the past 16 reporting seasons (2008-2024), companies that beat earnings expectations delivered an average rally of 5.2% on the day of the result, according to Bell Potter's Richard Coppleson. Even better, this momentum often carries forward, with these "winners" gaining an average of 6.7% over the next four months.

In a bearish market that drags down such performers, these stocks could be prime candidates to watch for resilience and upside when the dust settles.

Here are some standout performers from the February reporting season:

• QBE Insurance posted a 1H25 NPAT and interim dividend that beat Citi estimates by 1.7% and 13%, respectively. Its FY25 gross written premium guidance impressed, and its key combined operating ratio (COR) target of 92.5% edged out expectations of 92.3%.

• Ansell delivered a solid 1H25 beat across the board, with its full-year EPS guidance midpoint of 118.5 cents coming in 1.9% above market forecasts.

• Temple & Webster saw its shares soar over 25% between February 12 and 17 after reporting a first-half FY25 net profit of $9 million—well ahead of the $5.1 million analysts had anticipated.

Other notable names that shone include Bega Cheese, Nanosonics, Aussie Broadband, Helia, McMillan Shakespeare, and Coles, each delivering better-than-expected earnings.

Valuation reset

Some of the market's most consistent growth stocks trade at relatively expensive valuations, so a selloff may present an opportunity to buy these companies at a discount.

Pro Medicus (ASX: PME) is often highlighted as one of the market's best growth stories. Since 2015, its net profit has climbed at a compound annual growth rate (CAGR) of 43.5%, with its latest half-year FY25 result highlighting a 42.7% rise in net profit.

The company is operating at peak form, with near-flawless client retention and a vast global opportunity. Founder and CEO Dr Sam Hupert highlighted this momentum in the FY24 and half-year FY25 earnings calls, stating:

• "We maintain our record of 100% renewals to date, all at a higher price point than the original contracts and many for longer terms."

• “The last two months sort of eclipsed everything because we had unprecedented conversions.”

• "We are looking at some new geographic markets. But I think our main focus is currently the US simply because we have so much runway there, and we are making very significant inroads."

However, the stock had rallied as much as 220% between February 2023 and February 2024. At its February 19 peak, Pro Medicus traded at a price-to-earnings (P/E) ratio of approximately 315x. For perspective, TradingView’s daily PE data shows last year’s average P/E at 196, since 2020 at 159, since 2015 at 124, and since 2005 at 83.

This towering valuation hints that a selloff could offer a chance to buy in at a more palatable level — especially since a typical selloff, unless triggered by a recession, doesn’t undermine a company’s core fundamentals.