5 Stocks That Beat The Market In A Crash
The current bull run in stocks has lasted longer than any other, save the tech bubble of the 90s.
That in itself shouldn't be cause for alarm -- bull markets don't die of old age. What should worry investors, however, is the massive disconnect between economic fundamentals and stock valuations.
From weakening retail sales to corporate America heading for its sixth consecutive quarter of declining earnings, the fundamentals of the market conflict with the record highs we're seeing nearly every day.
But missing out on further upside isn't an option for most investors either.
What to do when all the data screams crash but the market keeps moving higher?
You find stocks that beat the market during a crash.
A Tale Of Two Worlds, Exuberant Markets Versus Dismal Economics
Profit expectations have come down for the third quarter, which is likely to mark six consecutive quarters of falling earnings for companies in the S&P 500. The global economy is struggling and the only thing keeping the United States out of recession has been auto sales and housing. Auto sales are weakening and uncertainty around Brexit may be enough to push the United States into a recession over the next year.
Against all this, stocks continue to hit fresh highs with the S&P 500 priced at almost 25 times earnings of companies in the index.
There isn't much holding up stocks other than global central bank policy, and even that may be running out of steam. The Bank of Japan said in late July that it would begin a comprehensive assessment of its monetary policy to determine if programs have been effective.
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It's the most definitive admission yet that monetary stimulus hasn't worked as well as authorities would have liked and may result in a new direction. If that new direction limits the tidal waves of money that have been flowing into bonds and stocks, the market could lose one of its only drivers.
How To Make Money And Protect Your Portfolio
The dilemma in all of this is that investors don't want to miss out on further upside in the markets. Bull markets don't die of old age. Jumping out of stocks when the economy starts to wobble means trading commissions and risks missing out on returns.
But there are stocks that can offer upside while still providing protection if the market starts to tumble. I ran the numbers on some of my favorite best-of-breed stocks to find remaining value, a strong dividend yield and historically low-risk compared to the market.
The S&P 500 reached its pre-recession peak on September 10, 2007, but even as the broader market fell each of my safety stocks were able to keep rising. Two picks didn't peak until September 2008 as investors rushed to safety and industry leaders.
Market volatility over a rolling six-month period peaked in September 2008, with annualized volatility in the S&P 500 reaching 58%, while the volatility of my safety stocks ranged from just 26% to 42% during the period.
Perhaps most interesting is the fact that while the five safety stocks were able to keep rising far after the market peaked, the lows were all within a month of the market trough. Investors didn't have to wait nearly as long for the five stocks to hit bottom and start rebounding.
Novartis AG (NYSE: NVS) has an advantage over other drug makers in its diversified business model, with sales in branded pharmaceuticals, generics, eye care and consumer staples. Most importantly here is its generic business through Sandoz, which can recapture some of the branded products' losses when they come off patent protection. Shares have struggled over the last year on fear of generic competition on a few key drugs, but the company has a strong late-stage pipeline including its heart drug Entresto and immunology drug Cosentyx.
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Shares of Novartis traded for over 20 times earnings in mid-2015, a valuation that could take the stock to $97 on earnings expectations of $4.88 per share over the next year. Drug sales are not as susceptible to cyclical pressure, and the company's generics business helps to capture price-conscious consumers.
Procter & Gamble Company (NYSE: PG) is correcting the missteps it made by moving into too many markets without focusing on brand identity. It will finalize a two-year strategy to sell off half of its branded portfolio by the end of the year, and could be ready to boost margins significantly. This renewed focus on quality and profitability will serve it well if the global economy stumbles. P&G still has the size and popular brands to negotiate better shelf space and pricing with retailers which should protect revenue even after it sheds some of its brands.
Earnings are expected higher by 5.7% to $3.88 per share over the next four quarters. The company has turned around a string of disappointments to beat expectations four consecutive quarters by an average of 5.2% each quarter. It's the most expensive stock in our list but should do well in a market selloff as investors rush to consumer staples and attractive dividends.
Wal-Mart Stores Inc. (NYSE: WMT) has struggled along with other traditional retailers on fears of growth in online shopping limiting top-line sales. While critics of Wal-Mart's online platform have a point, the $230 billion retailer has a size and price advantage that will leave it the last man standing in its market. If there is just one brick-and-mortar store left in the world, it will be Wal-Mart.
The company's recent acquisition of Jet.com could help it compete better digitally, and its massive scale gives it a wide economic moat. Shares saw a drop of less than half of what the broader market saw during the crisis, and shareholders only had to wait five months from the high to see the stock start to rebound, more than a month ahead of the rest of the market.
Shares of The Coca-Cola Company (NYSE: KO) are 6.8% off their April high on weak volume growth, especially in emerging markets, where currency effects have also weighed on earnings. Management downgraded its 2016 guidance to 3% sales growth during the second quarter earnings release.
The recent weakness could be a buying opportunity for shares that have jumped 190% since the bottom of the 2009 crisis. The company is diversified across non-carbonated beverages and juices in addition to its portfolio of soft drinks, and it enjoys one of the most recognizable brands in the world. Coca-Cola is selling its North American distribution assets and some manufacturing facilities through 2017, which could mean greater profitability and strong shareholder cash return.
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Southern Company (NYSE: SO) has added significantly to its electricity distribution with the recent AGL acquisition and its natural gas distribution business. The company has also been aggressively adding solar and wind projects to further diversify.
As a holding company for regulated utilities, Southern Company performed better than most during the financial crisis. Shares fell just 30% from the peak, and investors only had to wait five months for the price recovery to begin. Volatility was the lowest among these five safety stock picks, and the shares pay an attractive 4.2% yield.
While all five stocks were relatively protected during the last bear market and offer strong fundamentals going forward, Novartis and Southern Company stand out as the best opportunities for safety and return. Each is relatively cheap and pays a strong yield, while also benefiting from company-specific upside over the next year.
Risks To Consider: Company-specific factors may mean performance differs greatly in the next market crash compared to that seen previously.
Action To Take: Take a position in one or more of these safety stocks that have the potential to provide upside returns while still protecting you from volatility in a market selloff.
Editor's Note: The market is overvalued, but that's not the only thing you should be worried about... Virtually every new President to take office has had a devastating effect on economic growth. It happened with Obama, it happened with Bush and Clinton... in fact, it's happened to every president for 183 years. Will these 3 simple plays make you rich while the rest of the nation bleeds?
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