By Mark Hulbert, MarketWatch
The stock market’s post-New Year’s slide has shifted many investors’ attention away from highflying companies that do well when the market is rising and toward those that can hold their own even in a correction.
At its low point this past week, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.56% was 7.5% below its all-time high, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.08% was 6.1% below that threshold.
That isn’t a correction, which is defined as a 10% drop from the peak, and the market’s strength late in the week encouraged some to hope that the storm had passed — at least for now.
Still, the selloff was quick and sharp enough to remind investors that corrections are inevitable. So it might be a good idea to move at least some of your money into stocks that can best weather a downturn.
Historically, those are large, established companies with little debt, a high return on equity, a long record of earnings growth and limited earnings volatility.
Wall Street has a name for them: quality stocks.
A good example from the recession of 2008 is Wal-Mart Stores /zigman2/quotes/207374728/composite WMT -0.28% . It continued to earn a profit throughout that economic downturn, and its stock rose 7.7% between the market’s October 2007 high and its March 2009 low — compared with a loss of more than 50% for the S&P 500.
The following list of quality stocks was compiled by first taking the 100 companies currently rated “A” for financial quality by San Diego-based Ford Equity Research, an independent firm that has been evaluating stocks for 40 years. Its ratings are based on factors such as earnings growth and volatility, low debt, industry stability and size. The list was further restricted to those whose price/earnings ratios based on trailing 12-month earnings were less than 13 — which is significantly lower than the S&P 500’s 17.3. (The P/E ratio is calculated by dividing a stock’s price by earnings per share.)
A low P/E helps to insulate a stock during a downturn because investors tend to bail out of pricier companies faster when the market begins to decline. As long as you weight your portfolio toward quality stocks with below-market P/E ratios, you stand a decent chance of significantly outperforming the market during any decline as well as participating in any resumption of the bull market.
The 10 stocks below are the only ones that survived this winnowing process and are recommended by at least four of the advisers monitored by the Hulbert Financial Digest who have beaten the S&P 500 over the last 15 years — a long enough period to largely reduce the role of luck.
The list includes two insurance companies: Aflac /zigman2/quotes/208944541/composite AFL +0.99% and Allstate /zigman2/quotes/201974803/composite ALL -0.06% ; three banks, one domestic and two Canadian: Wells Fargo /zigman2/quotes/203790192/composite WFC +3.68% , Bank of Nova Scotia /zigman2/quotes/206642548/delayed CA:BNS +0.11% and Royal Bank of Canada /zigman2/quotes/200638870/delayed CA:RY +1.30% ; two computer-hardware firms: Apple /zigman2/quotes/202934861/composite AAPL +0.51% and Cisco Systems /zigman2/quotes/209509471/composite CSCO -0.23% ; telecommunications giant AT&T /zigman2/quotes/203165245/composite T +1.42% ; oil company Chevron /zigman2/quotes/205871374/composite CVX +1.70% ; and technology firm International Business Machines /zigman2/quotes/203856914/composite IBM -0.41% .
Inside the numbers: January jobs report
The labor market in January added 113,000 non-farm payrolls to the U.S. economy, a weak gain for the second straight month. The unemployment rate fell to 6.6%. Apple ramps up its share buybacks purchasing $14 billion of its own shares.
You might be surprised to see Apple on this list, as the company was a big casualty during the 2007-09 bear market. But Apple today is a far different company than it was then. At that time it wasn’t rated “A” for financial quality by Ford Equity Research, for example. And, unlike now, its stock then sported a P/E ratio that was well above the market’s. Its average P/E throughout 2008, for example, was 30.4, according to Value Line, a research firm; the S&P 500’s average P/E that year was in the low 20s.
You also might be surprised by the absence of other well-known stocks that often have appeared on other lists of quality stocks, such as Walt Disney /zigman2/quotes/203410047/composite DIS -2.25% , Johnson & Johnson /zigman2/quotes/201724570/composite JNJ -0.55% and Procter & Gamble /zigman2/quotes/202894679/composite PG +0.96% .
Even though many of these stocks fall solidly in the “quality” category, they currently trade at above-average P/E ratios.