Did your stocks survive yesterday's plunge? Yeah, neither did mine.
We aren't alone, at least. Only a handful of stocks survived the carnage. Among the few in the green were Palm
After yesterday's drop, investors have to be wondering whether this is a sign of things to come. And after 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 global credit concerns and the subprime mortgage fallout is simply becoming a self-fulfilling prophecy.
Whatever the case may be, yesterday's events were certainly another reminder that there is, in fact, risk and volatility 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 off your stocks based solely on recent events.
Although Palm, CV Therapeutics, and Rent-A-Center were three exceptions yesterday, they 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 those were:
|
Total Return |
|
|---|---|
|
Abercrombie & Fitch |
50% |
|
Lennar |
83% |
|
Southern Copper |
31% |
|
Constellation Brands |
92% |
What's their secret?
The stories behind each company's bear market growth are vastly different. Southern Copper capitalized on the growing global demand for commodities such as copper and zinc, Lennar profited from the expanding U.S. housing market, and Abercrombie continued to rake in cash from teenage shoppers -- a group that never seems to feel the effects of a slowing economy.
But all of them did share something in 2000: free cash flow. In other words, each company was fiscally sound and was 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 yesterday's market plunge and recent market volatility has served as a wake-up call for investors, it shouldn't be seen as 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. Palm is a Stock Advisor pick. CV Therapeutics is a Motley Fool Rule Breakers choice. Rent-A-Center is an Inside Value recommendation. The Fool's disclosure policy believes that a job ain't nothin' but work.
