Daily moves of 100 or more points in the Dow Jones Industrial Average have become commonplace, and there is always the looming threat of a market correction. In volatile times like these, there are certain stocks that work better than others. Some have large cash positions, some are recession-resistant for a variety of reasons, and some just have such a powerful brand that market swings won't affect them as much.
We asked three of our analysts to tell us their favorite stocks for volatile markets, and here is what they had to say.
Dan Caplinger: Choosing Apple (NASDAQ:AAPL) as a defensive stock pick certainly runs against the grain in many investors' eyes, as the tech giant has historically offered investment exposure that could magnify market volatility for shareholders. Yet on numerous occasions over the past couple of years, Apple's stock has moved independently of the market, sometimes sagging when most tech stocks climbed, and other times posting strong gains even when its peers were going nowhere.
What Apple has that many other stocks lack, though, is dependable performance. The company's most recent quarterly results are just the latest example of Apple's strength, with the success of the iPhone 6 line of smartphones accentuating the stranglehold that the iDevice-maker has over the high end of the mobile market. Moreover, Apple has grown its dividend recently and instituted massive buyback programs that could help put a floor under the stock in the event of a downward move for the broader stock market. Apple's extensive cash hoard also gives it the opportunity to benefit from any future market crash by making smart strategic acquisitions on the cheap. All told, Apple has a lot of desirable characteristics that conservative investors value, and that makes it a logical pick to protect against market volatility.
Jason Hall: Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B)has so many things that make it perfect for this role in your portfolio, I couldn't possibly list them all in a reasonable amount of words. Focusing on the ones that matter the most, though, should be sufficient.
To start, Berkshire's holding companies are immensely diverse, meaning the company isn't overexposed to any one industry that could drag the stock down excessively. These businesses range from railways to utilities, to insurance companies with exposure to multiple markets and geographies, to manufacturing of consumer and industrial products.
Second, Berkshire always carries a significant cash position, more than $62 billion through last quarter. Not only does that cash mean stability in rough seas, but it gives CEO Warren Buffett -- likely the greatest investor of our lifetimes -- the ammo he needs for his "elephant gun."
Third, few companies have the kind of management Berkshire does, and I'm not even factoring Buffett or longtime partner Charlie Munger in when I write that. The reality is, neither of these men are involved in the daily operations of the subsidiaries where more than 300,000 Berkshire employees work. The quality of people running all of those excellent businesses is a significant reason Berkshire is such a rock-solid, stable investment.
Combine these things, and you have a business that's built to last, and should be a source of strength in even the worst markets.
Coca-Cola is the dominant soda company around the world with 17 brands each with over $1 billion in revenue, and 20 more with between $500 million-$1 billion in revenue. While soda consumption is declining in developed markets, Coca-Cola has a long runway of growth in emerging markets as more consumers join the global middle class. The company has also been diversifying into newer fast growing non-alcoholic beverage categories, most notably last year by forging partnerships with Keurig Green Mountain (UNKNOWN:GMCR.DL) and Monster Beverage (NASDAQ:MNST).
With so much brand power and a massive distribution network built over decades in growing markets around the world, Coca-Cola has strong competitive advantages allowing it to put new brands into their distribution network and gain economies of scale that upstarts could only dream about. It is because of that brand power, distribution network, and economies of scale that it will be near impossible for anyone to ever disrupt Coca-Cola's business.
The reason the stock is great for volatile markets is that the company pays a quarterly dividend that it has steadily grown for over 52 years -- since 1963. At current prices, Coca-Cola has a forward yield of 3.1%, that's 75% higher than the market's yield of 1.8%.
The large dividend is great for volatile markets as research has shown that dividend-paying stocks are less volatile than the average stock as the stock price is supported by their high yield. Legendary contrarian investor David Dreman found in "When the Bear Growls: Bear Market Returns 1970 – 1996" that a high-yield dividend strategy declined half as much of the market during down quarters.
This is important with lower volatility as you are more likely to keep investing during declines instead of getting emotional and selling your shares. When the market and your portfolio are down, you can take comfort in knowing that with your dividends coming in you will have cash to take advantage of the low prices and opportunities created by the volatility.