Where to Find Stocks That Rise When the Market Falls

Individual investors are growing increasingly nervous about the potential for a stock market crash. Increased volatility on Wall Street has roiled the S&P 500 (SNPINDEX: ^GSPC) and other major market benchmarks, and even though long-term growth prospects still look solid, many investors would prefer to have a short-term safe haven in mind if a long-awaited bear market actually happens. Certain industries have tended to perform well even during market declines, especially those that tend to have higher dividend yields and more secure cash flow that's not as sensitive to cyclical declines. Below, you'll learn about three groups of stocks that have the potential to rise in a broader market decline.

1. Companies that sell essential goods

Conservative investors have long gravitated toward stocks in companies that sell consumer goods. Their growth potential is limited, making them less attractive for those seeking explosive gains in share prices. But with mature, stable businesses, consumer goods stocks often have huge customer bases that will keep buying products even during tough times. In addition, the cash flow that these businesses generate often lead them to pay high dividend yields, further cushioning the blow for investors during the market crash.

Consumer stocks won't always produce outright gains during the toughest markets, but they'll often offer much more modest losses. For example, Procter & Gamble makes some of the most popular consumer products in the world, including items that consumers desperately need for their everyday lives. During the last four months of 2008, when the S&P 500 was down 30%, Procter & Gamble limited its losses to 11%. That wealth preservation was extremely helpful for conservative investors. Companies like Monster Beverage and Molson Coors actually gained ground during that time period, showing that outright gains are possible. Moreover, stocks like ExxonMobil and Bristol-Myers Squibb, while not strictly being consumer stocks, saw gains in part because of ongoing consumer demand for gasoline and key medications.

2. Companies that provide essential services

Similarly, there are many industries that have relatively constant demand regardless of what's happening to the stock market. For instance, people still need electricity, water, and heat for their homes, and utility stocks tend to do well during market downturns as investors value more highly their stability and generally above-average dividend yields.

Southern Company is one example of a utility that managed to gain ground during the market crash in late 2008. Other companies in the sector weren't able to overcome so much downward market pressure, but they generally did much better than the overall market.

3. Companies with businesses that run counter to the cause of the market crash

Finally, the best source of stock ideas to weather market downturns are tailored to the specific causes of the downturn in question. For example, financial stocks can often be a smart way to handle down markets, but not when the cause of the market crash is a collapse in the financial system.

During 2008 and 2009, the market rewarded anti-recessionary stocks that offered cash-starved customers good value. Prime examples were fast-food giant McDonald's and discount retailer Dollar Tree, both of which served more customers seeking less expensive ways to meet their essential needs. Interestingly, airline stocks also did well, because plunging energy costs made their operations far cheaper, outweighing the negative impact of slight declines in travel.

Future downturns require similar forethought to identify potential winners. Currently, investors who are worried about what a trade war might mean for the market might consider stocks of companies that do most of their business domestically and therefore aren't vulnerable to retaliatory tariffs. Fears of rising interest rates that could hurt rate-sensitive stocks might actually help financial companies with business that benefits from rate increases.

There's no perfect answer

Unfortunately, you'll never be able to be 100% certain that a stock you pick will provide complete protection against a future downturn. There's always a risk that the stock you pick will itself play a key role in causing that downturn to happen. However, by focusing on the most common causes of market crashes and identifying those stocks that are least hurt or even benefit from those causes, you'll improve your chances of finding winners in a tough market.

10 stocks we like better than S&P 500 INDEXWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and S&P 500 INDEX wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of March 5, 2018

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool has a disclosure policy.