As has been the norm of late, last week ended in relatively dramatic fashion for investors, with the Dow Jones Industrial Average plunging 272 points to close at 16,102, more than 2,200 points below the all-time high the widely followed index set in May.
While this correction is far from being an official "stock market crash" -- which I might add has no set definition in terms of percentage or point value -- it's obviously possible that we could see a crash, or rapid descent in stock prices, that mirrors the week-long tumble we witnessed last month, pushing the market firmly into bear market territory. The key word in the above statement being "possible," because hindsight is the only thing that's 20/20 around here!
Keep in mind that corrections, and even bear markets, are a natural part of the stock market cycle, just as recessions are part of the economic cycle for the U.S. economy. Statistically, data demonstrates that long-term investors who don't waver from their investment strategies tend to outperform over the long-run since they don't have to try to guess what days they should buy or sell stock.
These sectors could help you ride out a stock market crash
Despite the comfort this knowledge will bring many long-term investors, it can still be somewhat unpleasant watching your core holdings move lower. With that in mind, today we'll take a brief look at three sectors you can consider investing in that could help you ride out a stock market crash (if one were to occur). As always, understand that these recommendations should be a starting point for further research and not an end point, and that sectors or stocks mentioned here could also move lower (remember that hindsight rule!).
Ultimately, the goal is to lose far less than the broader-market averages in a downturn, or perhaps even make money -- and I believe these three sectors could be worth a look if things do head south in a hurry.
To begin with, I'd encourage investors to consider taking a closer look at the gold-mining sector in the event of a stock market crash. I want to be clear that gold isn't guaranteed to move higher during a downturn in the stock market by any means, but the yellow metal does have a habit of becoming a safe-haven investment when fears of slowing growth arise and the stock market retreats substantially. Since mid-August, gold as a physical metal is up a little more than 3%.
Of course, you can't just throw a dart at the gold-mining sector and expect to hit a winner. Following a four-year decline in gold prices you'll need to really dig deep (pardon the pun) to find a miner that's done a good job of controlling its costs with gold still hovering around $1,100 per ounce.
A name to consider in this sector is Goldcorp (NYSE:GG), which reported all-in sustaining costs of $846 per ounce in the second quarter and hinted that it would come in toward the high-end of its 3.3 million to 3.6 million-ounce production estimate for the full-year. Goldcorp's $846 AISC means gold would have to fall another 25% before the company's positive free cash flow is even brought into question. It's true that lower gold prices have affected the size of Goldcorp's profits, and perhaps slowed its expansion plans, but this is otherwise a very healthy and cost-effective miner that could survive a stock market crash better than most stocks.
Electric or water utilities
Another smart way to survive a stock market crash is to buy into companies that offer inelastic goods or services. The best example I could think of here would be utilities that provide electricity or water -- two basic-need items for households whose demand will likely remain unchanged whether the stock market rises or falls by 3% in a day.
What makes utilities so attractive is that most tend to be regulated, meaning investors have little guessing to do when it comes to projecting annual cash flow. It also means these basic-needs utilities tend to pay handsome dividends that often top the broader market averages. Dividends are an especially useful tool during a possible stock market crash as they can help soften the blow of a move lower in stock prices.
A company to consider here would be the nation's largest electric utility provider, Duke Energy (NYSE:DUK). In April, Duke completed the sale of its unregulated Midwest commercial generation business, further pushing into the highly cash-flow-predictable regulated market and minimizing its exposure to wild fluctuations in the energy market. It's also been beefing up its investments in renewable energy, and focusing on improving shareholder value through share repurchase programs and a solid dividend. Sporting a current yield of 4.8%, you could certainly do a lot worse in the electric utility sector.
Finally, investors looking to outperform during a stock market crash might consider looking at one of the unlikeliest of sectors: mortgage real estate investment trusts, or mREITs.
As a whole, mREITs have been crushed for the better part of five years as they've witnessed their net interest margin shrink. The mREIT sector earns money on the difference between the rate at which it borrows money and the rate at which it lends, as well as by employing leverage. When lending rates are declining, their net interest margin tends to expand; but with the Federal Reserve near a point at which rates could rise, investors have anticipated the worst for the sector.
Yet, there's an interesting point worth noting. Overall, mREITs have held their own since the market began tumbling in mid-August. In fact, some have moved higher, such as Annaly Capital Management (NYSE:NLY).
I suspect the impetus for the move (for Annaly and the sector as a whole) is twofold. First, weakness in the stock market could curb the Federal Reserves' desire to boost lending rates, giving mREITs like Annaly an even longer reprieve on reduced net interest margins. Secondly, the valuations within the sector make sense, as do their high yields. Even when Annaly's book value falls, as is expected when rates begin to rise, I suspect the company will still be trading below its common stock book value. Similarly, even if Annaly's dividend payout falls (which is also likely as rates rise), its yield should handily trump the broader-market average. I believe Annaly could be a surprising safety net for investors in the event of a stock market crash.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.