How to Handle Market Volatility

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a market sell-off, one of the most tempting things to do is to sell. It’s an emotional impulse, and almost everyone has difficulty fighting it. The news comes out, and we read headlines like, “Dow down 200 points.” Investors get spooked and pull money out of the stock market. It happens in every market correction.

The bond market has been a difficult place for investors to be in. Precious metals have had a disastrous effect on wealth. Investors now have to look outside of bonds and precious metals in order to earn a reasonable return on investment.

What to do about it

This article is for the investor who is losing money in bonds and precious metals. I will focus on three companies that are likely to grow in the future, without all the unnecessary risk. These three companies will grow earnings, pay a dividend, and trade at a reasonable valuation. The business model has to be resistant to economic uncertainty and global risk.

Coca-Cola the freshest way to start

Coca-Cola (NYSE: KO) is one of my favorite investment opportunities right now. The company is well positioned to grow with bottling operations positioned all over the world. The company’s products are non-cyclical because of government subsidies for food (food stamps).

The company pays its investors a 2.82% dividend yield, which is superior to ten-year treasuries. The company is projected to grow earnings by 8.3% on average over the next five years. The company hopes to double its system revenue by 2010 and 2020. Data over the past two years indicates that the management team is well on track to meeting its 2020 vision.

The company trades at a 20.8 earnings multiple, slightly above the 19.8 industry average. The company’s valuation is justified when considering the low amount of risk, and the long-term growth rate. The company currently has a 0.5 beta, which indicates that the stock trades at half the volatility of the stock market.

The company has an attractive mix of growth, valuation, and income. The stock is also resistant to market fluctuations, and its product portfolio is resistant to economic recessions. This is an ideal investment for the risk averse.

Proctor & Gamble goes about business as usual

Proctor & Gamble (NYSE: PG) markets a strong portfolio of products that perform well in any economic environment, including laundry detergent, bathroom tissues, dishwashing detergent, shampoo, diapers, etc. The company is also fairly resistant to market fluctuations (0.4 beta), which indicates that the stock trades at less than half the volatility of the stock market.

The management team’s primary growth strategy is to cut back on costs right now. The company is also heavily dependent on emerging market economies for growth. The company forecasts that between 2010 and 2020 the middle class will increase by 1.4 billion, and 98% of that will come from the emerging markets. P&G is well positioned for growth.

Source: The World Bank

Based on the above figure, developing countries will grow by 6% in 2014 and will follow that with 6% growth in 2015. Assuming that’s correct, we can anticipate Proctor & Gamble to continue to prosper based on the economic outlook.

The company currently generates $10.7 billion in net income. The company plans to cut $10 billion in costs by 2016, which will total $20.7 billion in net income. If that is the case, then earnings will double. A double on earnings means that there could be a compelling investment thesis for the company. The company could grow earnings by more than 25% per year. The company also compensates investors with a 3.11% dividend yield. The stock is cheap relative to its future growth potential.

Hold your groceries

In any economic environment, people will shop for groceries. Everybody needs to stock up on spaghetti noodles, canned beans, rice, vegetables, fruits, and etc. Anyone can relate to the basic necessity of life, which is food.

I believe that one of the most underrated defensive stocks right now is Kroger (NYSE: KR). This company operates supermarket chains that should sound familiar, like Fry’s, Ralphs, Smith’s, Scott’s Food & Pharmacy, City Market, and Kroger. The company operates 3,600 supermarkets across the United States. The stock currently has a 0.4 beta, which basically indicates that the company has less than half the volatility of the broader stock market.

The management team believes that it can sustain growth at an 8-11% rate over the long-term. The stock also compensates its investors with a 1.78% dividend yield and trades at a 12.2 earnings multiple, which is reasonable based on the future earnings growth.

Conclusion

These three companies have limited economic downside, pay dividends, and have shown reduced volatility. All three will grow earnings. Any bond investor looking for a safe-haven in the stock market should consider investing in Coca-Cola, Proctor & Gamble, and Kroger.

 

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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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