Investors find themselves once again contemplating the idea of a market crisis with stocks off to a bumpy start so far in 2014. At the heart of current jitters are signs of financial stress from key emerging markets such as Turkey (TUR), South Africa (EZA), Brazil (EWZ), Indonesia (IDX) and even China (FXI). Of course, the post crisis landscape over the past several years has been littered with similarly good reasons for stocks to sell off only to see them rally to new highs. But following what is now a nearly five-year advance in stocks that has been virtually uninterrupted along the way, investors find themselves with an increasingly challenging dilemma. On the one hand, they may be inclined to exit the market to protect against a potential crisis event finally taking place this time around. On the other hand, they do not wish to miss out in the event that stocks advance yet another leg higher. Fortunately for investors, a select group of stocks exist that have shown the propensity to rise with the market over the last several years but also have demonstrated the ability to hold steady if not generate gains when the broader stock market descends in meltdown.
Three stocks in particular have stood out in this regard since the turn of the millennium. These are Wal-Mart (NYSE:WMT), McDonald's (NYSE:MCD) and Campbell Soup (NYSE:CPB). All three of these companies have a few specific and important characteristics in common.
First, each are high quality companies with high barriers to entry that have produced generally consistent operating performance over the years regardless of the economic environment.
Second, each has performed either in line with or above the S&P 500 Index (SPY) over the last three years.
Lastly and perhaps most importantly during times of crisis, each is an inferior goods producer that sells products that often experience increased demand during periods of economic weakness.
As a result, these stocks have shown themselves to be generally reliable safe havens during times of crisis. A walk through some key periods of market weakness over the last many years shows how.
The first example focuses on the bursting of the tech bubble that began in earnest in September 2000 and continued through October 2002. Over this entire time period when stocks as measured by the S&P 500 Index lost nearly half of its value, shares of Wal-Mart were higher by as much as +35% over this stretch and were still higher by over +7% as stocks plunged to their lows. Campbell Soup also provided a consistently positive return over most of this time period until the very end when stocks plunged to their lows. The same could be said for McDonald's over this stretch, as the stock held steady until one of the final legs lower in stocks during the third quarter of 2002.
The resilience of these stocks during the financial crisis was even more impressive. Although the broader market dropped by over -55% from October 2007 to March 2009, Wal-Mart once again traded higher over this time period. The same could essentially be said for McDonald's, which was higher by nearly +20% over much this entire stretch before falling to essentially flat by the March 2009 lows. As for Campbell Soup, it was positive by as much as +10% through the November 2008 sell off before getting pulled lower during the broader market's final descent through March 2009.
This steady performance continued during the post crisis periods of turbulence in 2010 and 2011 when Fed stimulus was being withdrawn from the market. For example, from late April to late August 2010, the stock market was lower by -14%. But both McDonald's and Campbell Soup traded higher over this same time period while Wal-Mart was lower by less than half the broader market at around -5%.
This pattern repeated once again during the market sell-off from late July to early October 2011, as Wal-Mart, McDonald's and Campbell Soup were each down between -1% to -3% when the broader stock market was down -18% over the same time period.
Each of these three stocks have shown the ability to hold steady if not advance during some of the most challenging market conditions over the last couple of decades. Thus, these companies may warrant consideration for those investors that might be seeking the ability to participate in any further upside in stocks while also working to protect against sharp downside.
Of course, past performance is not indicative of future results, and it is very possible that any of these three companies may behave very differently once the next period of extreme market volatility finally arrives. As a result, a rigorous fundamental analysis should be undertaken before considering the purchase of any of these names. But their recent track record during periods of extreme turbulence suggests that they are names that may be at a minimum worth keeping on the radar screen in preparation for the next potential bear market phase at some point in the future.