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3 Industries to Consider Buying During a Stock Market Correction

Sean Williams, The Motley Fool

For more than nine years now, the stock market has been in rally mode. Of course, you'd be hard-pressed to convince investors of that fact over the past two months.

After going the entirety of 2017 without so much as a blip of a downdraft, both the Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) screamed lower in early February, with each index setting a new mark for largest single-day point decline in history. As of this past weekend, the Dow and S&P 500 sat right around correction territory -- i.e., a drop of at least 10% from a recent high.

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Consider buying into these industries when the stock market dips

Corrections have a tendency to bring out the worst in investors. Despite the fact that the stock market has historically returned 7% annually, inclusive of dividend reinvestment and when adjusted for inflation, the swiftness of downside moves during corrections have a tendency to send investors scurrying for safety rather than looking for opportunities to invest. Of course, we know that buying during a correction has pretty much always been a smart thing to do. Of the 36 corrections in the S&P 500 since 1950, 35 (all but the current one) have been completely erased by bull market rallies.

So, what should leery investors be looking to buy with the stock market seemingly walking on eggshells? This investor has always been drawn to basic-need stocks when volatility picks up. Buying into industries that offer goods or services that are practically unaffected by the economy or stock market is often a good way to minimize portfolio volatility and sleep easy at night. Here are three such industries you may want to consider looking into.

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1. Big pharma

If the stock market is quickly losing steam, the healthcare industry is often an intriguing place to look for bargains. The reason being that we can't control when we get sick or what ailment we develop, meaning there's a steady stream of business regardless of whether the economy or stock market are performing well or poorly.

However, throwing a dart at the healthcare sector isn't a smart move. Money-losing healthcare companies may perform poorly if economic conditions worsen. Likewise, some aspects of consumer health products and medical devices may see slowing sales as consumers trade down to generic-brand consumer products and hold off on elective surgical procedures. If you're looking for the smartest play in healthcare, it'd be big pharma.

A drug developer like Pfizer (NYSE: PFE) does have a consumer health division, but it's predominantly driven by its higher-margin brand-name medicines. Last year, Pfizer reported adjusted net income of $16.1 billion and saw worldwide oncology sales soar 33% to $6.1 billion thanks to growth in Ibrance and Xtandi. As the icing on the cake, Pfizer also pays a 3.6% dividend. 

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2. Water utilities

When talking about life's true necessities, perhaps nothing tops air and water. Thankfully, no one is charging for air on more than a novelty basis. However, water is a utility that homeowners and renters do pay for. While weather patterns can certainly affect water usage to a degree, water utilities have come to expect a predictable level of cash flow from their customers each and every year. This predictability is something investors love.

For example, few water utilities stand out more than American Water Works (NYSE: AWK). According to American Water's annual report, it grew profits by 7% from 2016 and reaffirmed its long-range compound annual earnings growth rate of 7% to 10%. It also announced its intent to reinvest $8 billion to $8.6 billion over the next five years in water infrastructure. 

Most importantly, American Water Works operates in regulated states. While this means it can't just pass along price hikes at will to its consumers, it also ensures that the company isn't exposed to wholesale price fluctuations. Sporting a 2% yield, it could be dripping with potential.

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3. Apartment REITs

Finally, remember that folks need a place to live, even when the stock market is sinking, or the economy isn't looking as robust as it once was. While a weaker stock market can weigh on the housing industry, it tends to do little to no harm to apartment rentals. In fact, it can actually bolster the desire to rent, making apartment-based real estate investment trusts (REITs) an intriguing option to consider.

AvalonBay Communities (NYSE: AVB) might be worth a look considering that its apartment communities cater to a more affluent clientele. These higher-income renters from across the U.S. are much less susceptible to stock market swings and economic fluctuations, leading to more consistent occupancy rates and funds from operations for AvalonBay.

Furthermore, with the Federal Reserve tightening monetary policy, the cost of a mortgage (vis-a-vis interest rates) may rise, pushing those on the fence back into renting. This helped AvalonBay pass along inflation-topping rental increases in 2017. AvalonBay also offers a market-topping 3.4% yield for your consideration. 

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.