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How to Invest in a Historic Market Sell-Off

By Adria Cimino - Updated Mar 23, 2020 at 6:32PM

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A broad stock sell-off is a perfect time to pick up shares of great companies that will later boost your portfolio.

Stocks officially entered a bear market on March 11 after the longest bull market in history. But this average of 30%-plus sell-off isn't a reason to hit the panic button. Those holdings you're tempted to sell today may recover over time. Instead, this sell-off is a signal for long-term investors to shop for stocks that will lift their portfolios once this crisis is behind us.

Where to begin? Here are a few tips.

An investor holds his head in frustration as he sits in front of stock market charts on his computer.

Image source: Getty Images.

Look to the future, look to the past

As novel coronavirus cases climb to more than 350,000 worldwide, it's clear most companies will experience some degree of effect right now. It could be a supply disruption, the cost of hiring temporary workers, or lost sales.

The bright spot in all of this is that the situation is very likely temporary. In some cases, the crisis will hurt a quarter or two of earnings. In others, we may face a longer period of lackluster sales and profit. That is why it's important to look further ahead on a case-by-case basis. And that starts by looking at earnings reports prior to the coronavirus outbreak and determining whether that level of performance or better can happen after the crisis is over.

As you consider stocks to buy, think of companies that, once past this hurdle, will be back to business as usual -- whether that may be next month or next year.

Bargain hunt for great companies having a tough time

It's time to look for stocks that are suffering now, but as mentioned above, have what it takes to rebound. Nike (NKE 1.47%) is a good example. Revenue in the current quarter is likely to take a hit after the maker of athletic clothing and footwear temporarily shut stores due to the crisis. What may prolong the pain is the postponement of sports events worldwide. Nike launches special products for championships like the Euro 2020 soccer championship, and such events represent advertising opportunities. Though Nike revenue may not be a slam dunk this year, it's clear that once sports events are back on the calendar, a market leader like Nike will recover. Nike shares have lost 31% this year, and the shares are trading at their lowest in relation to earnings since November 2017.

Check out stocks that are still performing

Once you've picked up some bargains, it's time to check out shares that have resisted the crisis. Here, look at how and why the company has managed to outperform the market and consider the company's prospects for future growth. In this market sell-off, Amazon (AMZN 0.25%) shares have managed to stay afloat, rising about 1.1% so far this year. Sure, Amazon is lucky that it just so happens to be a retailer of consumer staples offering delivery at a time when so many people are on lockdown. But Amazon isn't sitting back and letting things happen. The company is spending more than $350 million worldwide to boost pay for workers in fulfillment, transportation, stores, and delivery through the end of April and creating 100,000 jobs to handle demand. While some investors might shy away from buying shares close to an all-time high -- which is Amazon's case -- during a sell-off, I say it is worth doing on a case-by-case basis. If Amazon can weather this storm, I'm confident growth can continue in easier times.

Consider stocks paying dividends

A market sell-off is a good time to reinforce your portfolio with dividend stocks, as they offer a steady source of annual income. For this, look to companies with a long history of dividend increases. It's even better if you can find a dividend stock that offers a decent entry point. Coca-Cola (KO 1.63%), down 24% this year, fits the bill. The company last month announced the 58th consecutive increase to its annual dividend and said it paid $6.8 billion in dividends to shareholders in 2019. The beverage giant's cash dividend payout ratio shows the company paid out 81% of its free cash flow as dividends over the past year. Coca-Cola's free cash flow has climbed nearly 80% since a low point in July 2018 to reach the current level of $8.42 billion, meaning investors can be optimistic about its ability to continue payouts.

Though it's never pleasant to see your investments decline, there is plenty of opportunity during a market sell-off to set your portfolio up for future gains.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,151.82 (0.25%) $5.44
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$60.98 (1.63%) $0.98
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$108.00 (1.47%) $1.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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