In recent years, the phrase "seekingalpha " has come into
vogue. This refers to the ability of a portfolio to outperform
the broadermarket or a related set of benchmarks. Yet in light of
the market's choppy start to the second quarter, it may be better
to seek "beta ."
What's beta? It's the measurement of how astock tends to react
to the broader market. A stock with a high beta -- say, of 2.0 --
means itwill typically move up or down at twice the rate of the
broader market. (You can find this figure on the
StreetAuthority's Yaho o Finance page. Just enter in astock
symbol and click its "key statistics" page.)
Right now, it's time to focus oninvestments with low or even
negative beta. That way, you'll sleep well at night -- or
evenprofit -- if the market heads south.
Low Beta = Defense
Low-betastocks are often referred to as "defensive stocks." These
aren't stocks that operate in the defense industry -- they're
stocks (and sectors) that tend to hold their own in any market
Take electric utilities, for example. Both
Consolidated Edison (
Southern Co. (
, which are among the largest power providers in the eastern
United States, each have a beta of less than 0.25. For that
matter, other utilities such as
Northwest Natural Gas Co. (
WGL Holdings (
have very low betas.
Of course, such a low beta means that these kinds of stocks
may not move very quickly when high-growth tech stocks are
zooming ahead. Instead, investors often like them for their
steady and growing dividends. And with such low betas, a 20% drop
in the stock market would typically entail less than a 5% drop
for these stocks.
Companies in the food business are also often seen as low-beta
plays. Regardless of the broader economic climate, people still
need to eat. As a result,sales and profits for these companies
tend to be quite stable.
General Mills (GIS)
, which owns dozens of brands such as Betty Crocker, Haagen-Dazs
and Yoplait, is a model of consistency. Everyyear , management
hikes thedividend (at a 10% annual pace over the past five
years), and the company's base of investors tends to simplybuy
and hold this stock. As a result, its beta is quite low. Yet even
a seeminglydefensive stock is capable of solid share
If you are looking for fresh stocks in this extendedbull
market but are leery of getting in as the party is ending, then
be sure to check out the beta. It's a good practice to know the
beta of all of your portfolio holdings, as the highest-beta
stocks may make the best sell candidates when it comes time to
For some investors, it's crucial tohedge against a falling market
by owning stocks orfunds that tend to move in the opposite
direction of the stock market. These are known as "negative beta"
investments. You won't find any stocks that have a negative beta,
as they would eventually fall to zero as the stock market tends
to rise over the course of many years.But there are a number of
exchange-traded funds (
) that do the job. These are known as inverse funds, as they move
in the opposite direction of the market. The most popular
negative-beta inverse funds include:
ProShares UltraShort S&P500ETF (SDS)
: This ETF moves at twice the rate of the S&P 500 in the
Direxion Daily Small CapBear 3XShares (TZA)
: This ETF moves at three times the rate of the small-cap
focused Russell 2000 in the opposite direction.
ProShares Short QQQ (PSQ)
: Thisfund moves in the opposite direction -- on a 1-to-1basis
-- as theNasdaq 100.
Risks To Consider:
A focus on low-beta stocks could lead to an underperforming
portfolio if the market moves yet higher. A focus on
negative-beta investments could cause you to losemoney when the
Action To Take -->
The S&P 500 has already managed to fall more than 1% on two
separate occasions since the beginning of April. Those drops may
be a sign that the long-standing bull market is getting tired. A
sideways market is often a harbinger of an eventual shift in
market direction, which is why it's important to take a defensive
posture when you're aiming for furtherupside . As this chart
shows, the S&P 500 is just above its50-day moving average ,
and any move below 1,540 may signal trouble ahead.
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