Is the market due for a correction?

There seems to be a growing chorus of market observers calling for a pullback in stocks. Some think stocks have moved too far too fast, while others believe that stock prices now reflect a fair value based on earnings estimates for the near future.

Perhaps some of you agree that the market is headed for a sell-off. In fact, you may actually be hoping for a correction in order to get money off the sidelines and participate in this rally.

Yet the truth of the matter is that no one knows if or when a correction will take place. Given the huge rally off the March lows, I wouldn't be too surprised to see stocks give back some of those gains. Then again, with economic data points looking better than expected, the market could continue marching higher.

What to do?
Instead of worrying about a stock market correction, the better course of action is to look for stocks that you'd be comfortable owning even if the market does sell off. For me, that means owning businesses that will continue to perform even if the economic environment remains weak. Ideally, they should have little or no debt on their balance sheets and have a fairly attractive valuation.

But how do we find stocks that meet the aforementioned criteria? Motley Fool CAPS is a great place to start. Using its screening tool, I looked for top-rated companies with a market cap of $1 billion or greater, a price-to-earnings ratio of 15 or less, a long-term debt-to-equity ratio below 0.5, and a three-year earnings-per-share growth rate of at least 5%.

That screen returned 45 stocks. I whittled that down to five stocks that are somewhat defensive and that I would be comfortable owning through a downturn in the overall market. Take a look:

Company

CAPS Rating
(out of 5)

P/E

Long-Term
Debt / Equity

3-Year
EPS Growth

Becton, Dickinson (NYSE:BDX)

*****

14.4

0.29

17.8%

EMCOR Group (NYSE:EME)

*****

9.0

0.17

30.8%

Johnson & Johnson (NYSE:JNJ)

*****

13.3

0.18

7.3%

National Oilwell Varco (NYSE:NOV)

*****

8.9

0.07

42.9%

Precision Castparts (NYSE:PCP)

*****

13.6

0.05

32.0%

Source: Motley Fool CAPS, data as of Sept. 14, 2009.

Rest easy
Investors who focus on owning stable companies at cheap valuations will be able to rest easier. By knowing that your stocks have strong fundamentals and solid long-term prospects, you can deal with stock market volatility more comfortably. What's more, these stocks should move higher with the rest of the market if economic conditions remain bullish.

Further Foolishness:

Fool contributor Rob Plaza, CFA, does not own shares in any of the companies mentioned in this article. Johnson & Johnson is a Motley Fool Income Investor selection. Precision Castparts and National Oilwell Varco are Motley Fool Stock Advisor picks. Try either newsletter free for 30 days. The Foolhas a disclosure policy.