Last Thursday, the S&P500, Nasdaq CompositeAnd Dow Jones Industrial Average all reached unprecedented highs, with the Dow crossing the 40,000 level for the first time in its more than 125-year history.
The stock market has weathered a multitude of challenges over the past six years, including the U.S.-China trade war, the COVID-19 pandemic, election uncertainty, supply chain challenges and now inflation. Despite concerns about slowing consumer spending, Walmart beat earnings estimates last Thursday, which confirmed that consumers may be overcharged, but major retailers are still posting strong results.
Some investors may look at the state of the stock market and think that something must eventually break given that there are many cracks that have not gone away. But experienced investors know that timing the market isn’t a good long-term strategy because it’s hard to know when to return once you’re gone.
A better approach is to target particularly strong companies that can withstand a correction. Here is why the Vanguard Value ETF (NYSEMKT:VTV), Coca-Cola (NYSE:KO)And Microsoft (NASDAQ:MSFT) are all worth buying even if the market sells off.
A balanced ETF that focuses on proven companies
The Vanguard Value ETF is a great choice if you want to continue putting new capital into the market while avoiding being too aggressive. It focuses on companies that are making a lot of money now rather than those that could earn a lot of money in the future.
By comparison, the Vanguard Growth ETF includes all stocks in the “Magnificent Seven,” a term used to describe seven industry-leading growth stocks. The Vanguard Value ETF does not include any of the Magnificent Seven. Its largest holdings are companies like Berkshire Hathaway, Broadcom, JPMorgan Chase, UnitedHealthAnd ExxonMobil. The focus is on value and income.
The fund’s price-to-earnings (P/E) ratio is just 18.3 and the yield is 2.5%, a significant discount to the S&P 500’s P/E ratio of 27.5 The fund also has an expense ratio of just 0.04%, which is negligible even if you invest thousands of dollars in the ETF.
Overall, it’s a good way to achieve diversification by targeting stable, proven pockets of the market rather than hot growth stocks.
A recession-resistant income security
Coca-Cola is a high dividend stock that you can count on during a market correction because of the size of its dividend and its ability to pay it. Coca-Cola yields 3.1%, which generates significantly more passive income than the S&P 500, which yields just 1.3%.
Coca-Cola is a heavy sector with limited growth prospects and, unsurprisingly, it has underperformed the market in recent years. But the venerable company is showing signs of returning to significant growth in its top and bottom line. Coke is also a dividend king, having achieved 62 consecutive years of dividend increases in February when it announced a 5.4% increase, bringing the quarterly dividend to $0.485 per share.
I fully expect Coke to underperform the broader market over the long term due to the nature of its business model. But Coke did a great job avoiding big mistakes. He doesn’t let himself be too tempted by opportunities. Instead, it remains primarily in the soft drinks category – which is noticeably different from its peers. PepsiCowhich is found in drinks and snacks, among other things.
There’s a capacity to be remarkably mediocre, and Coca-Cola has it in spades. The stock is not overvalued, with a P/E ratio of 25.4 despite a record high. This is a good, safe stock to buy if you want to stay invested in the stock market but are focused on capital preservation rather than capital appreciation.
Microsoft is built to handle volatility
At first glance, Microsoft seems like an odd choice if you think there will be a stock market correction. The stock is just a few percentage points off its all-time high and is up 234% over the past five years.
Stock market declines occur for a variety of reasons. But they are typically driven by uncertainty and slower, or even negative, earnings growth. Instead of wondering if a stock is overvalued, it’s better to imagine how the company (not the stock) would perform in a downturn.
Microsoft isn’t the cheapest “Magnificent Seven” stock, but it’s arguably best positioned to take market share during an industry downturn due to its diversified business model and strong balance sheet.
Microsoft generates revenue from a variety of different high-margin business units, including:
Microsoft Intelligent Cloud includes Microsoft Cloud, Azure, GitHub and cloud services.
Productivity and business processes include Microsoft Office for commercial and consumer customers (including artificial intelligence solutions such as Microsoft Copilot subscriptions), LinkedIn, Office services and dynamic business solutions.
More Personal Computing, a segment that includes the Windows operating system, gaming hardware through Xbox, and first-party content through Activision Blizzard. It also includes search and news advertising like Bing, Microsoft News, and Microsoft Edge.
All things considered, Microsoft does a lot of very different things very well. Here’s a look at its results for the nine months ended March 31. Compared to the nine months ended March 31, 2023, revenue increased by 15.8% and operating profit by 26.8%.
Metric | Smart Cloud | Productivity and business processes | More personal computing |
|---|---|---|---|
Income | $76.9 billion | $57.4 billion | $46.1 billion |
Operating income | $36.7 billion | $30.4 billion | $14.4 billion |
Operating margin | 47.8% | 53% | 31.2% |
Data source: Microsoft.
Microsoft’s operating profit is growing at a faster rate than its sales, boosting margins across the board. High margins provide the flexibility to reduce prices at the expense of profitability to boost sales when end markets are weak. Whereas a competitor with lower margins doesn’t have as much flexibility.
This is an extremely profitable business that generates a ton of cash to pay a growing dividend, repurchase shares, and fuel organic growth. But Microsoft would still be a great company even if its growth wasn’t as fast or its margins were lower. It’s the kind of company that’s likely to emerge from a recession relatively stronger than it started, even if its short-term results take a hit.
The right way to handle a market sell-off
Even in a stock market correction, that doesn’t mean it’s a good idea to invest in ultra-safe stocks if they don’t fit your risk tolerance. If you have a time horizon of several decades, it’s important to make sure you’re exposed to companies that benefit from growth in the economy.
In other words, being too defensive can lead to lower-than-expected gains over time, as many low-growth companies tend to underperform the S&P 500 in prolonged bull markets.
Finding companies that are well positioned to weather an economic decline, even if they take a hit in the short term, are ones worth buying and holding during periods of volatility.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway, JPMorgan Chase, Microsoft, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, and Walmart. The Motley Fool recommends Broadcom and UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Are you worried about a stock market correction? 1 Vanguard ETF, 1 Dividend King, and 1 “Magnificent Seven” Stock to Buy Now was originally published by The Motley Fool