The market might still technically be in an uptrend, but with the S&P 500 sporting a trailing P/E near 19 here in its 43rd month without a correction of 10% or more, the risk of a sizeable pullback is too big to ignore.
On the flipside, with investors effectively ignoring the risks and continuing to bid stocks higher, it’s tough to remain on the sidelines.
The solution? Look for safe stocks to buy — names that won’t get trashed (names that might even rally) should the broad market finally unravel.
OK, OK. It’s easier said than done.
So to help speed up the process, here’s a look at stocks to buy that may pose considerably less risk than the average stock does at this time.
‘Safe’ Stocks to Buy: Advance Auto Parts, Inc. (AAP)
Pegging Advance Auto Parts, Inc. (NYSE:AAP) as one of only a handful of safe stocks to buy in front of a market correction has little to do with it being a defensive name. Rather, it has more to do with the fact that auto parts stocks have removed themselves from overall market’s pool and have instead been moving completely on their own merits for the past few years.
This independence can pay off big when the market tanks.
That being said, it’s not as if Advance Auto Parts hasn’t earned the right to do well in all environments. It as well as its peers have largely become the picture of consistent sales and earnings growth over the past decade, as repairing an automobile has become preferable to replacing it.
During marketwide selloffs, that frugal mindset becomes even more stronger.
‘Safe’ Stocks to Buy: Wal-Mart Stores, Inc. (WMT)
It’s cliche, but even if the market tanks and investors conclude a recession is in the cards, they’ll assume the consumption of consumer goods and low-end products will remain constant. That puts Wal-Mart Stores, Inc. (NYSE:WMT) at the top of the list of safe stocks to buy should the market turn sour.
In fact, WMT might be a particularly compelling pick if the summer of 2015 is the harbinger of a correction for the broader market.
Yes, the company just posted disappointing Q1 results, and WMT shares paid the price, falling 4% on Tuesday, bringing the year-to-date loss to 11%. Walmart also has been on the receiving end of plenty of criticisms regarding its slow, uneven turnaround.
The more a pendulum swings, however, the bigger the counter-swing. One small, fear-based nudge could drive investors right back into WMT just as quickly.
‘Safe’ Stocks to Buy: Southern Co (SO)
Perhaps even more cliche than buying a discount retailer when the going gets rough is the purchase of a utility company; we’re never going to turn the lights and air conditioning off regardless of how tight money becomes.
With that as the backdrop, Southern Co (NYSE:SO) has earned a spot on a list of safe stocks to buy during a marketwide pullback … or even if there’s just a risk of one.
Perhaps adding to the safety profile of SO shares is the fact that the stock is down 17% from its Jan. 29 peak. While some investors were understandably concerned it was overvalued at the time, its own pendulum might well have correctively swung too far in the other direction now.
‘Safe’ Stocks to Buy: The Coca-Cola Co (KO)
While a sharp loss from the stock market may crimp purchases of cars and vacations until confidence is restored, consumers are likely to keep in grabbing that 12 (or 20) ounces of cool, caffeinated goodness without a second thought.
In other words, The Coca-Cola Co. (NYSE:KO) has little to worry about in any conceivable environment.
Coca-Cola, however, also has something of an ace up its sleeve … a relationship with Keurig Green Mountain Inc (NASDAQ:GMCR). Specifically, Coca-Cola carbonated drinks can be created using the Keurig Kold. The response to the Keurig Kold has been lukewarm so far (and even bordering on disappointing), and it’s not even on the market yet.
But that’s not the point.
When the market is falling apart, it’s all about perception. And the perception is, Coke has a money-saving solution in the works. That mental connection will further help keep KO afloat when other stocks are sinking in the meantime.
The clincher is the dividend. KO yields a healthy 3.2% payout, and cash payments become even more important when investors suspect capital appreciation is off the table.
‘Safe’ Stocks to Buy: Home Bancshares Inc (HOMB)
Don’t sweat it if you’ve never heard of Home Bancshares Inc (NASDAQ:HOMB) — most investors haven’t.
With a market cap of only $2.3 billion, HOMB doesn’t exactly turn heads. But it’s a name that (by default) should be seen as one of only a handful of safe stocks to buy if a correction materializes. Why’s that? Its beta is a mere 0.91, which means whichever direction the S&P 500 moves, HOMB only moves 91% as much in the same direction.
That being said, there’s another reason why investors may want to make a point of owning Home Bancshares if stocks fall apart in the middle of 2015. That is, HOMB is working on a major recovery, and may be in the midst of finishing up a cup-and-handle pattern.
Regardless of the shape of the recent pattern, Home Bancshares has undeniably turned a downtrend into a budding uptrend.
‘Safe’ Stocks to Buy: ProShares Short S&P 500 ETF (SH)
Although it’s the only ETF to make our list of safe stocks to buy should stocks suffer a correction, the ProShares Short S&P 500 ETF (NYSEARCA:SH) isn’t the only way to effectively short the market by going long on a fund. It’s just the best-known one.
There are plenty of other choices, man of which are also leveraged (meaning they rise even faster than the market falls).
That said …
While SH gains in value when the market implodes, inverse ETFs aren’t for the faint of heart or for people who can’t keep close (read “daily”) tabs on their positions.
While owning an individual stock gives you a reasonable chance to do well regardless of what the market does, with an inverse ETF like the ProShares Short S&P 500 ETF, you have to be right or you have to be out fast.
‘Safe’ Stocks to Buy: Merck & Co, Inc. (MRK)
Along with consumer goods and low-end items, most people don’t cut back on healthcare spending just because the stock market is pointed in the wrong direction … largely because an insurer rather than the individual is paying the bill.
Ergo, a diversified large cap pharmaceutical name like Merck & Co., Inc. (NYSE:MRK) is seen as a safe haven when the market’s waves start getting choppy, sending a wave of buyers into the stock after investors have shed their more aggressive and market-dependent names.
The dividend yield of 3% that Merck offers isn’t too shabby either.
‘Safe’ Stocks to Buy: Apple Inc. (AAPL)
A consumer technology company’s stock can thrive while other stocks can’t? If that consumer technology company is Apple Inc. (NASDAQ:AAPL), then yes.
Just hear me out.
There are only a handful of so-called cult stocks the market can support at any given time. There are only two such large-cap names right now: AAPL and Tesla Motors Inc. (NASDAQ:TSLA). While a marketwide correction may spook TSLA owners, the Apple crowd is likely to see their “go-to” stock as one of the market’s only survivors that can face the headwind.
It seems counterintuitive at first, but when the chips are down, investors tend to flock to names they have absolute faith can continue to draw a crowd the way the maker of the iPhone always can.
‘Safe’ Stocks to Buy: Roper Technologies Inc (ROP)
Roper Technologies Inc (NYSE:ROP) makes a variety of products, ranging from fluid pumps and water meters to digital imaging software and vibration sensors, just to name a few. It’s undeniably a boring line of products, at the extreme other end of the excitement spectrum that the Apple iPhone is on.
And that’s the attraction. Boring is beautiful in weak markets, as investors innately know those mundane products continue to sell (think “groceries for industrial companies”) in nearly any environment.
The bonus for ROP is that being a relatively small $17 billion company, it’s off the radar for most investors as well as the financial media. Its distance from the market’s “herd” of big-name stocks makes it even easier for Roper to not get caught up in any bearish tide.
‘Safe’ Stocks to Buy: Berkshire Hathaway Inc. (BRK.A, BRK.B)
Last but not least, if you’re convinced a selloff is imminent but you just don’t want to hunt down your own basket of safe stocks to buy, just buy into Warren Buffett’s proverbial basket of safe companies by stepping into some Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B). It’s chock-full of the value guru’s (and his team’s) top picks.
Underscoring the long-term viability of the Berkshire Hathaway portfolio is that Buffett has the bulk of his own personal invested in Berkshire shares.
And just for the record, although Buffett says his favorite holding period is “forever” and that neither he nor his portfolio managers time the market, Buffett does reallocate his portfolio on a regular basis to defend against the market’s inevitable ebbs and flows. After decades of experience, he’s certainly equipped to do it as well as anybody.
Indeed, if a correction is looming now, Buffett has likely already made the appropriate adjustment for the Berkshire portfolio.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.