It's been a rough couple of weeks for investors. Although stock market corrections are considerably more common than you likely realize, the speed by which the market has dropped over the past 2.5 weeks has certainly raised some eyebrows.
Since the S&P 500 (^GSPC -1.11%) hit its all-time closing high on Feb. 19, panic surrounding the spread of coronavirus disease 2019 (COVID-19), and a subsequent price fallout in the global crude market, has caused 19% to be lopped off the market's benchmark index. This past Monday, March 9, was particularly brutal, with the S&P 500 logging a 226-point decline, its largest in history, equating to a 7.6% drop. This marks its 17th-worst single-session percentage performance in history, and was the market's darkest day since the height of the Great Recession in 2008.
But the good news, at least when it comes to the stock market, is that there's always light at the end of the tunnel. Every single stock market correction in the S&P 500 has eventually been completely erased by a bull-market rally. The key is to simply find high-quality businesses at fair valuations and buy them for the long haul. This is the strategy that investment geniuses like Warren Buffett and Peter Lynch abide by, and they've been exceptionally successful while doing so.
Below, you'll find five top stocks that I believe the smartest investors are likely buying right now.
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Bank of America
Money-center banks have been among the hardest hit since Feb. 19, with Bank of America (BAC -0.47%) losing nearly 40% of its value. BofA is one of the most interest-sensitive of all big banks, meaning the Fed's monetary loosening is going to lead to smaller net interest margin and less net interest income. The double whammy here is that about 2% of BofA's loan portfolio is tied to the energy sector, which got walloped earlier this week.
While there's no doubt that interest income could be constrained in the near-term, Bank of America has made significant strides in reducing its noninterest expenses (e.g., closing some of its branches), improving the credit quality of its outstanding loans over the past decade, and promoting digital banking and mobile apps. It's substantially cheaper for the company to have consumers utilize these apps compared to interacting with a teller in a bank branch.
Additionally, don't overlook the importance of Bank of America's capital return program. In June 2019, BofA announced a $37 billion share buyback and dividend return program over the next 12 months, with a $26 billion capital return program announced the year earlier. These share repurchases will help push earnings per share higher, with the recent pullback lifting BofA's yield to a hearty 3.3%.
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Johnson & Johnson
Another company that should be squarely on the radars of smart investors amid the coronavirus panic is healthcare conglomerate Johnson & Johnson (JNJ -0.36%).
Think about this for a moment: We don't get to choose when we get sick or what ailment(s) we develop. That creates a pretty steady of stream of demand for the high-margin pharmaceuticals, medical devices, and consumer health products that J&J offers. This steady cash flow has been responsible for 36 consecutive years of adjusted operating earnings growth, and has allowed Johnson & Johnson to raise its payout for 57 straight years.
Johnson & Johnson is also special in that all three of its operating segments brings something to the table that its other operating segments may lack. Consumer health products, for instance, is a slow-growing segment, but its offers some of the most predictable cash flow and solid pricing power. Meanwhile, medical devices may be struggling with commoditization now, but is well-positioned to benefit over the long run from an aging global population and improved access to medical care. Then there's pharmaceuticals, which generates the bulk of J&J's margins, but is constrained by the finiteness of patent exclusivity. Each segment plays a key role in making J&J the stalwart it is today.
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Visa
If we've learned anything as investors, it's that you always buy the dip in payment-processing giant Visa (V -0.70%). Although its dividend yield of 0.7% isn't much to look at, this is a company with huge market share in the U.S. and considerable competitive advantages.
As of 2018, Visa controlled about 53% of U.S. credit card market share by network purchase volume. That's up more than 10 percentage points since 2008, with the dollar amount being transmitted on its payment networks in the U.S. increasing by 137% over this 10-year span to nearly $2 trillion in 2018. The United States is the largest economy in the world by gross domestic product (GDP), and approximately 70% of its GDP is dependent on consumption. This makes Visa an indispensable part of the U.S. economy, yet still gives it plenty of opportunity to penetrate into underdeveloped global markets.
Furthermore, it's worthwhile to note that Visa is a payment facilitator and not a lender. When credit market turmoil picks up and credit delinquencies become a potential problem for lenders, Visa doesn't have to worry. This is why it tends to fare so well during recessions.
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AT&T
Even though telecom giant AT&T (T -0.44%) has held up considerably well and lost "just" 10% of its value since the S&P 500 hit its peak, smart investors are liable to bounce on this bargain and its 6% dividend yield.
Let's remember that AT&T generates a good chunk of its profit from its wireless division. With smartphones becoming something of a basic-need good, and wireless customers on subscription-based plans, customer churn is unlikely to rise much, if at all, just because of the spread of COVID-19 cases within the U.S. and abroad. This means relatively steady and uninterrupted cash flow moving forward. Not to mention, the rollout of 5G networks should lead to a healthy tech-upgrade cycle and even more data usage from consumers.
AT&T has other assets to lean on as well. Although its traditional cable assets (e.g., DIRECTV) could see downswings in ad-pricing power if the U.S. economy deteriorates, it has a growing base of streaming users, as well as HBO Now under its umbrella of media assets. AT&T is going to be just fine, and smart investors know it.
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NextEra Energy
Finally, utilities, such as electric and gas provider NextEra Energy (NEE -0.36%), are a smart way to weather this storm and generate long-term income.
When the stock market becomes volatile, it's never a bad idea to consider buying into businesses that supply a basic-need good or service. No matter the state of the U.S. economy, homeowners and renters will still need electricity or gas to light their homes and keep them temperate. This makes electricity usage fairly consistent from one year to the next, thereby allowing NextEra Energy to get a pretty good idea of what sort of cash flow it can expect.
NextEra Energy is also a big investor in green energy projects. No utility is currently generating more power from wind or solar than NextEra, which has played a key role in pushing its electricity-generation costs well below that of its peers. Now that lending rates are once again pushing lower, NextEra will have the option of leaning on cheap financing to broker additional renewable energy projects.
