The market has seen a pullback from the highs. What too many investors forget is just how healthy a stock market correction can be. Not only does it evaporate some of the froth that can develop, but it provides great buying opportunities in tons of sectors and individual names.
The S&P 500 gave us its first 5% correction on a closing basis since the fourth quarter of 2020. That’s beyond the average time it takes to see a typical pullback, and a 10% correction isn’t all that rare either. Could we be setting up for a further dip? We certainly could, although we may have seen the low in the latest correction.
In any regard, these types of pullbacks give us an idea where the relative strength is. That is, what stocks held up the best during the correction — and which ones could hold up the best in the coming weeks.
Here are seven names we are watching in the event of a stock market correction.
- Tesla (NASDAQ:TSLA)
- Ford (NYSE:F)
- General Motors (NYSE:GM)
- Pioneer Natural Resources (NYSE:PXD)
- McDonald’s (NYSE:MCD)
- Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW)
- Federal Realty Trust (NYSE:FRT)
Now, let’s dive in and take a closer look at each one.
Weathering the Stock Market Correction: Tesla (TSLA)
Right off the bat, I know it’s going to irritate some investors that we’re leading off the list with Tesla. However, the relative strength with this name has been undeniable. While Tesla currently lacks the volatility that we’ve become accustomed to, doesn’t mean it hasn’t been enjoying a steady ride higher.
Even though there’s been a lot of pain in the electric vehicle (EV) and SPAC EV spaces, doesn’t mean that same pain has translated to the entire auto sector.
From the Sept. 2 high to the Oct. 4 low, the S&P 500 corrected 5.8%. On the other hand, since Sept. 2 — the day the S&P 500 topped — Tesla shares are up about 19%
Furthermore, the stock has rallied in eight-straight weeks dating back to late August and has rallied in 11 of the past 12 weeks. It’s like there wasn’t even a market correction underway.
If the markets come under further selling pressure, Tesla may get hit. Any one of the stocks on this list may get hit for that matter. But so far, this one has shown strength, and that’s going to attract attention during a correction.
Sticking with the autos, Ford stock also demonstrated quite a bit of relative strength during the latest correction. Shares are now higher in each of the last five weeks, which actually dates back to the beginning of September.
The stock fell just 2.5% from Sept. 2 to its low later that month, before exploding higher by almost 22%.
Like Tesla, I know it’s hard to trust the auto stocks. For Tesla, it’s because of its valuation and volatility. For Ford — and the next stock on the list, GM — it’s due to years of underperformance, stubbornly low valuations and a volatile business.
Obviously the supply chains have not made life easy for automakers, but investors have been flocking to these names as of late and the relative strength shows.
In the case of Ford, the company recently said it’s going to increase production of its electric F-150 Lightning pickup truck due to high demand. Additionally, the company is investing heavily in its EV and battery production units, as it looks to level the playing field.
Weathering the Stock Market Correction: General Motors (GM)
If you’re sick of reading about the auto stocks here, rest assured that this is the last one on the list. Much like Ford, GM suffered a small correction in early September.
From the low on Sept. 2, GM has had a move much like Ford, rallying 16% since that day. It also recently ripped off five-straight weeks of gains.
Naysayers will point out the obvious: These names have rallied too far, too fast and if there’s a stock market correction, they’re coming back to earth too. That may be true. But it’s impossible to counter this argument: If investors were long Tesla, Ford and GM coming into September, they enjoyed solid gains vs. volatility and losses in the broader market.
Like Ford, GM is also investing heavily in its EV technologies and will look to leverage this area as its next area of growth.
Pioneer Natural Resources (PXD)
There is a caveat with Pioneer Natural Resources, which has easily outperformed the most recent stock market correction.
The caveat is that Pioneer Natural Resources will be tied to oil prices. If oil performs badly, then PXD stock is likely to underperform as well. That said, oil has been strong. If you look at a chart of oil prices, it doesn’t even look like there was a correction in the equity markets last month.
The commodity saw a negligible decline from the start of September to its low that month, before exploding from sub-$70 a barrel to more than $80. If oil prices remain elevated, then Pioneer Natural Resources and other energy stocks should continue to trade well.
So far, this isn’t the usual “stock market correction” list one would have expected to see. But that’s where the relative strength has been: Autos and energy, among a few others.
Weathering the Stock Market Correction: McDonald’s (MCD)
McDonald’s is another stock that didn’t flinch during the latest stock market correction. Shares fell about 1% from Sept. 1 to Sept. 7 before bottoming and going on a solid rally. Coming into this week (starting Oct. 11), McDonald’s stock has risen in five of the past seven weeks.
What do Tesla, Ford and energy stocks all have in common? The spotlight!
These names are under constant discussion, as EVs and oil remain a focal point among market participants. Unlike these names, McDonald’s has slowly but surely continued to move higher.
Shares recently hit year-to-date (YTD) highs earlier this month, although it’s not getting much discussion. Up almost 14% so far on the year, and bulls may find this one to be a solid holding through the fourth quarter.
Not to mention, investors have to like the 2.28% dividend yield.
Home Depot (HD) or Lowe’s (LOW)
It seems silly to go with two names here, but they are too similar to pick one or the other. While the stock market correction began in September, these two stocks didn’t worry about the pullback. That’s as housing remains strong and as consumers continue to invest in their properties.
Both companies have also made substantial investments in their online and omni-channel sales solutions. That not only helps in the fight against Amazon (NASDAQ:AMZN), but it also helps drive top-line growth.
2021 has been a good year for both Home Depot and Lowe’s, up 35% and 39%, respectively. Both of those figures easily outpace the S&P 500, which is up about 18% so far this year.
Will that momentum continue through the fourth quarter?
It’s impossible to say with 100% certainty, but both of these companies are operating at high levels while taking advantage of a strong home improvement market. We may see a minor pullback in Home Depot and Lowe’s, but I would expect the bulls to come back to these names quickly in the event of a larger market pullback.
Weathering the Stock Market Correction: Federal Realty Trust (FRT)
Real estate investment trusts (REITs) really took a beating during the Covid-19 selloff in March 2020. Many investors were worried about which tenants would or could pay rent on time — if at all. Federal Realty Trust is a blue-chip REIT holding, but it and many other high-quality REITs were butchered in the selloff.
However, unlike many companies, FRT has not seen a rebound back to its pre-Covid highs. For such a high-quality company, that doesn’t seem right. Particularly for one that pays out a dividend yield of 3.5%.
That said, shares have been trading much better lately. They even look to be on the verge of a possible breakout.
As it pertains to a stock market correction though, FRT stock is one to keep an eye on. Not only does it have dependable income and a stable business, but the stock is pretty stable too.
Shares did correct a bit with the overall market, but are back to flat from the September highs. If another correction hits, look for stability in Federal Realty Trust.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.