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3 Stocks Retirees Should Buy on a Market Pullback

Rich Smith, Neha Chamaria, and George Budwell, The Motley Fool

At The Motley Fool, we don't believe in timing the market. At the same time, we're only human, and we know human nature.

When it's your retirement savings on the line, sometimes -- especially when stock markets look as richly valued as they do today -- you need an incentive to give you the extra nudge you need to buy. A stock market pullback can provide just such an incentive. So if you're looking to add to your stock market holdings, and if you're lucky enough to see a pullback happen, here are three stocks our investors think you should add to your shopping list: Sherwin-Williams (NYSE: SHW)Johnson & Johnson (NYSE: JNJ), and Amazon.com (NASDAQ: AMZN).

A cartoon image of two men in suits looking panicked as a stock chart falls through the floor.

The color to watch out for

Neha Chamaria (Sherwin-Williams): Shares of the paint and coatings specialist are trading at all- time highs, having jumped a whopping 42% year to date. That also means at 30 times price-to-earnings and 26 times price-to-cash flow, Sherwin-Williams is no longer a bargain buy. Yet retirees shouldn't miss any opportunity to scoop up some shares if the market drops, simply because Sherwin-Williams has all the ingredients you require in a retirement stock.

For starters, Sherwin-Williams is a 150-year-old, fundamentally solid company with a wide moat. It dominates its industry and is a household name when it comes to paints, thanks to its hugely popular namesake products and brands, including Dutch Boy. Management has done an incredible job over the years combining own-store network expansion with timely acquisitions to bolster growth.

Thanks to a well-thought-out capital allocation strategy, Sherwin-Williams shareholders have reaped rich returns. The company holds a record of 38 consecutive years of dividend increases, has generated returns on equity of 30%-plus in each of the past 10 years, and has been a six-bagger in the past decade.

Sherwin-Williams is confident of integrating its just-concluded Valspar acquisition successfully and hopes to boost its dividend by at least 50% by 2020. The potential in Sherwin-Williams stock is simply too big to ignore -- a market pullback is all you need to be part of the growth story.

This healthcare stock can overcome any hurdle

George Budwell (Johnson & Johnson): If history is any guide, even this protracted bull market should eventually lose steam and revert to the mean. And when it does, investors may want to have some dry powder ready to buy top defensive stocks like the healthcare giant Johnson & Johnson. J&J, after all, has shown over the course of its lengthy 130-year history that it can literally overcome any type of headwind to create value for its shareholders. 

In fairly recent times, for example, J&J's industry-leading pharma pipeline has produced several major new drugs that have proved more than capable of offsetting the declining sales of hepatitis C medicine Olysio, as well as the anti-inflammatory drug Remicade. Newer drugs such as the multiple myeloma medicine Darzalex, and the blood cancer therapy Imbruvica, for instance, have rapidly gained market share to keep J&J's overall pharma sales headed in the right direction.

And in the not-so-distant future, J&J's newly approved plaque psoriasis drug, Tremfya, is also expected to contribute to the drugmaker's top-line in a big way -- with its peak sales estimated to eventually reach $3.2 billion within just a few short years. 

In all, J&J's stock is arguably worth buying on a broader market pullback simply because it has the R&D chops to keep its top and bottom lines moving higher -- making this healthcare titan a fundamentally sound stock to own in any type of market. 

When it's time to buy, buy the best stock you can think of

Rich Smith: (Amazon.com): Market pullbacks are difficult to predict. In fact, stock market sage Warren Buffett goes so far as to say that no matter how expensive the market, "no one can tell you when these traumas will occur."

That said, when a market pullback does occur, says Buffett, such an event "will affect virtually all stocks," good and bad alike. My humble advice: When the pullback happens, buy the good stocks -- stocks like Amazon.com.

Seriously, folks, has there ever been a company better than Amazon? More than two decades after setting up shop, Amazon.com isn't just "still growing" -- it's growing faster than ever. Over the past five years, S&P Global Market Intelligence data shows Amazon stock increasing its earnings at the annual rate of 38.5%. Over the next five years, Amazon is projected to grow earnings at nearly 54% per year as the company maintains its lead in Web hosting and e-tailing, amps up competition with Netflix in video streaming, and expands into everything from drones to food delivery to the bricks-and-mortar retailing of organic veggies -- and maybe even rocket science.

Admittedly, at more than 250 times earnings, Amazon stock is anything but cheap. It's going to take a really big market pullback to put Amazon stock anywhere near "value stock" territory. But if that pullback comes, and if it does make Amazon cheap, I'll be first in line to "1-Click" Amazon stock.

More From The Motley Fool

George Budwell has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Johnson & Johnson. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.

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