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Top protection plays in rocky US markets

With U.S. stocks choppy again Wednesday, investors sought safe picks in an increasingly uncertain market.

The major U.S. indexes reversed big losses, as the Chinese yuan declined against the dollar for a second straight day amid efforts by Beijing to kick-start a slumping economy. The CBOE Volatility Index—which measures short-term expectations for market uncertainty—was up as much as 10 percent before paring those gains, and the Dow Jones industrial average closed slightly negative, its ninth loss in 10 sessions.

With a backdrop of rocky equities, fund managers offered their best protection plays on CNBC's "Power Lunch."

Utilities/Energy

Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

S&P 500 utilities climbed more than 1 percent Wednesday despite broader market struggles. The sector was one of the top overall performers last year, but has failed to maintain that momentum.

Dominion Resources and Sempra Energy look primed to benefit if stocks continue to suffer, said Margie Patel, a senior portfolio manager at Wells Capital Management. Shares of Dominion and Sempra, which provide gas and electricity, both rose more than 2 percent Wednesday.

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Williams Cos. will profit from its strong role in natural gas transportation infrastructure, said Josh Duitz, manager of the Alpine Global Infrastructure Fund. He noted that the company has seen takeover interest, including a bid from Energy Transfer Equity in June.

"We like the fact that the yield is growing 10 to 15 percent over the next five years," Duitz noted.

Residential solar provider SolarCity also looks appealing in the current market, said Kevin Landis, manager of the Firsthand Technology Opportunities Fund. The company's shares climbed more than 4 percent Wednesday.

Financials

Financial companies like JPMorgan Chase are another pick to shelter investors from the foreign exchange storm, said Mark Tepper, wealth advisor at Strategic Wealth Partners. Financials were the best-performing sector for second-quarter earnings, registering roughly 20 percent year-over-year growth, Tepper said.

Unlike other categories, financial firms like the Bank of New York Mellon have pricing power in the form of increasing fees and premiums, Tepper noted. He added that a financial-sector ETF like XLF could make a strong pick.

"We think the prospects for those stocks and the financial sector are very promising," Tepper said on "Power Lunch."

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Wells' Patel also likes the outlook for PNC Bank.

"I'm looking more for increased loan growth and organic growth in their business," Patel said.

Transportation

Other fund managers looked to air travel to ride out the market turbulence. JetBlue—a stock that has soared about 45 percent this year—can go higher because of lower fuel costs and the advantages of providing cheaper flights, said Brian Peery, manager of the Hennessy Cornerstone Mid Cap 30 Fund.

The stock dipped nearly 2 percent Wednesday, and Peery noted that weakness offers an entry point.

"I think they're doing everything that they need to, to build the airline," he said.

Duitz also likes Grupo Aeroportuario del Sureste, a Mexican airport operator that can trade in the U.S. through an American depositary receipt. He noted that its traffic grew by more than 15 percent in July.

Consumer

Another safe haven for investors is consumer-facing companies, which can ride stronger domestic demand and are shielded from outside volatility, the analysts said.

With the dollar stronger compared to the euro and Chinese yuan, U.S. companies operating abroad face currency headwinds. Meanwhile, oil and gas related industries have been hampered by low prices.

In contrast, companies that make products for domestic consumers, like Skechers, down 5 percent on the day, can provide great long-term buying opportunities, said Peery.

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Food and product packager Sealed Air, about 1 percent lower Wednesday, could see a sales pickup in the food and product care division later this year, Peery said, since the company cut costs and increased margins. Patel sees cosmetic maker Estee Lauder, down more than 1 percent Wednesday, and drugstore CVS, up slightly for the day, as potentially stable picks.

As the domestic housing market improves, related industries like floor maker Mohawk Industries, which has had some successful acquisitions, and retailer Home Depot, should see growing demand, according to Peery and Patel, respectively.

Health care

Pharmaceutical company Allergan should ride out the market volatility, Patel said. Its stock has risen more than 20 percent this year, but slipped half a percent Wednesday.

Peery also likes Centene, which provides health-care services to governments. While it has spiked more than 30 percent this year, it also shed more than 2 percent Wednesday.

Disclosures:

Margie Patel owns AGN, EL, CVS, HD, PNC, D and SRE in her fund.

Mark Tepper and his family do not own XLF, JPM or BK. XLF and JPM are owned in client accounts.

Brian Peery owns JBLU, SEE and MHK in his fund.

Kevin Landis owns SCTY through his mutual funds.