5 Smart Ways to Profit From a Stock Market Correction

By Markets Fool.com

The stock market has rebounded lately, but it's still a long way off from its 2015 highs. And just in case this rally runs out of gas, it's smart to be prepared for another market drop. With that in mind, here are five suggestions from our contributors that can not only help you survive a stock market correction, but also set yourself up to come out of it even better off than you went in.

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Selena Maranjian: A great way to improve your ability to profit from inevitable occasional stock market corrections is to be ready for them -- with a list of stocks you'd love to own.

You can do that by maintaining a watch list. Here's how it might work: Every time you run across or think of a company that impresses you and that you'd like to own, jot it down. You might keep your list in a notebook, but it's far easier to do so online -- ideally via an online portfolio that you can set up at a number of major financial websites. (It would not be your actual portfolio of stocks you own, but a separate one.)

Once the companies are in an online portfolio, you can click on it at any time and see how it's doing. You will likely also be able to easily check up on news relating the companies. There are several ways to set up the portfolio. You might pretend that you bought one share of each company of interest, at its price on the day it was added to the portfolio. Thereafter, whenever you look at the portfolio, you'll see how much it has risen or fallen. When the market drops, you'll easily be reminded of stocks of interest and will see how far they've fallen.

If you're willing to do more work, you can make this system serve you better by entering stocks of interest not at their going price, but at your estimate of their intrinsic value. So if Scruffy's Chicken Shack (ticker: BUKBUK) seems worth $25 per share, you add a share of it at that price. Thereafter, whenever you look at the portfolio, you'll see at a glance how over- or undervalued it is. You'll need to revisit and perhaps revise your estimates regularly, of course.

Matt Frankel: One of the best things you can do in a stock market correction is to pick out the best-in-breed stocks that are trading at a discount. This is especially true if the correction was caused by or dragged down a particular sector. Obviously, the energy sector has been beaten down thanks to low oil prices, but we all knew that already.

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However, the banking sector has performed terribly in 2016. Even after the recent rebound, many banks are trading for valuation multiples not seen in several years. Just to name a couple of my favorites, now is a great time to take a look at rock-solid banks such as Wells Fargo and U.S. Bancorp . Both of these banks have excellent asset quality, efficient operations, and superior profitability. Plus, they're trading for price-to-tangible book multiples last seen in 2012 (USB) and 2013 (WFC).

Or if you have a little more risk tolerance, take a look at Goldman Sachs , which is trading for less than the value of its tangible assets. Often regarded as the top U.S. investment bank, Goldman once had Warren Buffett calling his investment in the company a "bet on brains," because of Goldman's reputation for attracting and hiring the best minds on Wall Street.

Brian Feroldi
: Speaking of Buffett, one smart and easy way to profit whenever the stock market takes a tumble is to mimic the actions of the greatest investor of our time. It's easy to do so. Since the SEC requires the disclosure of all financial moves every quarter, investors can review his recent transactions and add a few shares to their own portfolio.

One stock Buffett has been purchasing recently is Deere & Company , the giant agricultural equipment maker. Buffett recently purchased 5.8 million shares of the company's stock, which brings his total ownership up to 22.9 million shares.

Deere & Co. looks like a classic Buffett investment, The company boasts an iconic brand name that its customers appreciate and are willing to pay a premium for. That brand gives the company a durable competitive advantage and a leg up over its competitors.

Buffett obviously sees a lot of value in the company's stock, which is down more than 16% from its 52-week high. That's likely owed to both the general market sell-off and the huge decline in commodity prices, which has decreased the demand for the company's agricultural products. Sales dropped 13% last quarter, and its management team is forecasting an additional 10% drop in 2016, but that situation is likely to correct itself over the longer term, since the world's population is growing and farmers around the world depend on Deere & Co.'s equipment to help them increase production. While investors wait for the turn to happen, they can enjoy the company's 3% dividend yield and take comfort in knowing the company has a history of plowing billions into its share-repurchase program.

The Oracle of Omaha clearly sees value in the company's shares, so copying him by adding a few shares to your own portfolio might prove to be a smart move.

Jason Hall: One of the best ways to take advantage of a market correction is also one of the simplest, easiest ways to invest: dollar cost averaging. That may sound complex or technical, but it's just fancy talk for regularly investing new money into the same thing on a regular basis. Not only is this a simple way to invest for the long term, but it also takes advantage of every market correction, since you'll continue investing right through the bottom.

Here's an example, usingVanguard Growth ETF. Let's say you started investing $200 per month into this ETF on the first trading day of the month in January 2006, and use the Great Recession to demonstrate how you can benefit from this strategy.

For the first two years, 2006 and 2007, you would have Invested $7,200 and bought around 140 shares, based on the closing price on the first trading day of the month, and reinvesting dividends. In 2008 and 2009, you would have invested the same $7,200, but you would have bought 171 shares, or about 22% more shares.

I know, you could argue that this also means you're buying at the market peak, and that's true. But here's the hard, cold reality of investing: Even the most successful investors struggle with market timing. Instead of falling into the trap of thinking you can do any better, dollar-cost averaging is a great way to get out of your own way, and make sure you profit from the corrections, even if you do buy at the top, too.

Dan Caplinger: A lot of investors find it difficult to do in-depth analysis on individual stocks during a market correction. Even if you feel strongly that declines for a particular sector might be overblown, figuring out exactly which stock is most likely to benefit can be challenging. If you therefore don't take any action, you can miss out on a promising opportunity.

Fortunately, there's an alternative. By using exchange-traded funds that focus on particular sectors of the market, you can make an investment decision based on your beliefs about a selected industry without having to drill down all the way to the individual-company level. Sure, you won't always get the highest possible return by doing so, as you'll end up with exposure to several companies within the same sector. However, if your investment thesis is correct and the entire industry bounces back, a sector ETF will generally reflect those gains. Moreover, you'll often do better than you would have if you'd picked an individual stock that turned out not to move as favorably as you had expected.

Finally, you can always use sector ETFs in conjunction with individual stocks. For instance, if you know energy is ready to rise but don't know which energy stock will be best, buying an energy ETF while you do further analysis ensures that you won't miss out on a general upward move for the sector as a whole. Once you have time to look further, you can sell the ETF and buy your chosen individual stock. That can give you the best of both worlds in a market correction.

The article 5 Smart Ways to Profit From a Stock Market Correction originally appeared on Fool.com.

Brian Feroldi has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Jason Hall owns shares of Wells Fargo. Matthew Frankel owns shares of Goldman Sachs. Selena Maranjian has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool is short Deere & Company and has the following options: short March 2016 $52 puts on Wells Fargo. 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.