Smart Stocks for a Choppy Market

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Depending on whether, and exactly how, efforts to reform health care play out, some firms might get squeezed. "There is a whole political shadow that is being cast over that area," Caughey says of health care.

Government may seek to cut costs, including drug prices and reimbursements to hospitals and doctors. That's why Jeff Layman of BKD Wealth Advisors seeks out companies "trying to figure out ways to deliver products in a cost-efficient way." He likes generic drug makers like Teva Pharmaceutical Industries (TEVA).

Consumer Staples

This sector also traditionally holds its own in a downturn. Even the worst-off consumer will still buy food and other necessities. Many also keep buying alcohol and tobacco.

Consumer-staples firms tend to be "steady performers, kind of oblivious to the business cycle," says Bryant Evans of Cozad Asset Management. He likes ConAgra Foods (CAG), one of the world's largest packaged-food companies.

Another classic stock in this sector is Procter & Gamble (PG), which makes everything from shampoo to dog food to batteries. Church also recommends Diageo (DEO), the world's largest liquor distributor. "People will probably drink in any environment," he says.

All three companies are international firms, meaning even if some sales suffer in the U.S., they can make them up by selling to fast-growing economies around the world.

Technology

Technology is definitely not a classic defensive sector. Overinflated tech stocks led markets lower in the bear market earlier this decade.

But many argue tech has the momentum to ride out a recession, especially if that recession is most concentrated in the financial and housing sectors.

Earnings of tech firms look great. As of this week, technology sector earnings in the second quarter were projected to be up 13% over last year, according to Reuters Estimates. That may set up the sector for an excellent second half of the year.

Another plus: The valuations of many technology firms are quite reasonable, especially when compared with their sky-high stock prices earlier this decade.

Technology's biggest advantage may be its international reach. As long as a recession stays confined to the U.S., tech firms should be able to live off their substantial overseas profits. U.S. technology companies also benefit from a falling dollar.

Take IBM (IBM). The $155-billion firm has a "huge exposure to non-U.S. markets," Caughey says.

A decade ago, many tech companies were young and risky, basing their prospects on unproven technology. Now, many tech companies are "pretty mature in their product cycles," says Sam Dedio, a fund manager at Julius Baer.

You could argue some big tech companies are becoming more like utilities, he says. For example, Microsoft's (MSFT) software is now a necessity for many corporations. "It's almost like putting the lights on," Dedio says.

Cisco Systems (CSCO) also has products the world now seems to need. Church says the firm, which reported a 25% rise in quarterly profit Aug. 7, is busy "getting [the] Internet up and running in emerging markets."

Indeed, whether it's broadband, batteries, or Band-Aids, the safe-harbor companies we've identified here have thrived by providing products and services their customers find it hard to live without. And investors might find their stocks just as indispensable when putting together a well-balanced portfolio.

Steverman is a reporter for BusinessWeek's Investing channel.