A Sign of Things to Come?

Did your stocks survive the market's 3% slide last week? Yeah, mine neither.

We aren't alone, at least. Fully 78% of the stocks on the S&P 500 failed to break even. Among the few in the green were Tenet Healthcare (NYSE:THC) and Gap (NYSE:GPS).

Considering the market volatility we've experienced over the past eight months, investors have to be wondering whether this is a sign of things to come. And after four years of solid 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 global credit concerns, a weak dollar, and the subprime mortgage fallout may turn out to be a self-fulfilling prophecy.

Whatever the case may be, recent events remind us yet again of the stock market's risk and volatility.

Lesson learned
While this would be a great time to reassess your risk exposure, it would be folly to sell off your stocks based solely on recent events.

Tenet and Gap, two exceptions last week, show that not all stocks follow general market sentiment.

In fact, during the last bear market from August 2000 to March 2003, when the S&P shed 42% of its value, fully 1,810 stocks posted positive gains.

Among them were:

What's their secret?
The stories behind each company's bear-market growth are vastly different. Arch Coal capitalized on the growing global demand for coal, PetSmart continued to define the pet-services industry, and Starbucks provided a caffeine fix to millions of customers.

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 go about business as usual during a very hectic time for the U.S. markets.

Bringing it full circle
So while last week's volatility served as yet another wake-up call for investors, it was also a reminder that not all stocks follow adverse market trends. Now's a great time to make sure 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.

Fool contributor Todd Wenning's random '90s movie of the day is Mo' Money, starring Damon Wayans. Tim owns shares of Starbucks, which is a Stock Advisor pick. Gap and PetSmart are also Stock Advisor picks. Gap is also an Inside Value recommendation. VF is an Income Investor choice. The Fool's disclosure policy believes that a job ain't nothin' but work.