Did your stocks survive the market plunge on Tuesday, Feb. 27? Yeah, mine neither.
We aren't alone, at least. Only 13% of NYSE and 9% of Nasdaq stocks finished the day higher, and all 30 Dow Industrial stocks felt the market's wrath as well. The few stocks still in the green included Student Loan
After February's drop and the recent market volatility we've experienced, investors must be wondering whether this is a sign of things to come. Following four solid years of market gains, it wouldn't be out of the question for the market to enter a prolonged selling period.
On the other hand, perhaps the markets are so convinced of an impending slide that the confluence of rising Treasury yields, high gasoline prices, and tense geopolitical events is simply becoming a self-fulfilling prophecy.
Whatever the case, recent events remind us that there is, in fact, risk in the stock market.
Lesson learned
While this might be a great time to reassess your risk exposure, it would be folly to blindly sell your stocks based solely on uncertain market conditions.
Although Student Loan and NeuStar were two exceptions in February's plummet, they show that not all stocks follow general market sentiment.
In fact, during the last bear market from August 2000 to March 2003, where the S&P shed 42% of its value, a whopping 1,810 stocks posted positive gains.
They included:
|
Total Return, August 2000 |
|
|---|---|
|
H&R Block |
135% |
|
Applebee's |
150% |
|
Boston Scientific |
176% |
|
Lockheed Martin |
66% |
|
Bed Bath & Beyond |
80% |
What's their secret?
The stories behind each company's bear-market growth are vastly different. Lockheed capitalized on increased defense spending, H&R Block did people's taxes, and Applebee's took care of dinner.
But all of them did share something in 2000: free cash flow. In other words, each company was fiscally sound and generating extra cash by the time the bear market rolled around. This made it much easier for them to conduct business as usual during a very hectic time for the U.S. markets.
Bringing it full circle
So while the market volatility in February and this past week has served as a wake-up call, it shouldn't be considered a forecast that all stocks are headed downward. Now is a great time to make sure that you're invested in financially sound companies with strong business models and reasonable valuations.
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This article was originally published Feb. 28, 2007. It has been updated.
Todd Wenning's random '90s movie of the day is Mo' Money, starring Damon Wayans. Bed Bath & Beyond is a Motley Fool Stock Advisor and Motley Fool Inside Value pick. The Fool's disclosure policy believes that a job ain't nothin' but work.
