Another week, another rally? The
began the current trading week on a high note once again, and it
seems as if this
just can't be stopped. The S&P 500 has moved higher in 13 out
of the last 15 weeks, and the current week looks like it will
extend that streak. Yet with that
now firmly ensconced above the 1,400 mark, the bull and
cases are beginning to sharpen.
side, money is pouring into the market at a fevered clip as
funds shift their bias to bullishness. Individual investors are
playing their part as well: The
conducted by the American Association of Individual Investors
(AAII) shows bullish investors holding a 13 percentage point lead
over bearish investors.
To be sure, stock prices are simply a function of supply and
demand, and demand is quite strong right now.
The bearish side also has some merit. Economists express concern
that the recent run of positive economic data may have run its
course and fear the U.S.
will cool in coming months. This is precisely the scenario that
played out in 2011, as a strong start to the year met with a
cooling off period in the spring that led to a market rout in the
Technical analysts also talk of an over-bought market right now,
and a number of measures suggest we're due for a pullback.
For now, investor enthusiasm is the overarching theme, though who
knows how long that will last? What is known: a certain group of
stocks should benefit from a rising market, while also
much more robust downside protection.
I'm talking about low-beta stocks. Beta measures how a stock moves
in relation to the broader market, and those with a
of less than 1.0 means that they are fairly decoupled from the
broader market. [My colleague Tim Begany recently touched on this
theme. You can read his take on the best stock to own for a
I went searching among stocks in the S&P 500 (large cap stocks)
and S&P 400 (
stocks), and found 38 of them to have a beta below 1.0 and also
have a price-to-earnings (P/E) ratio below 12. Even if the economy
growth becomes a real challenge, these low-priced stocks won't get
penalized for their valuations.
Below is a table of 20 stocks that sport a beta of less than
Here's what this list is telling me...
1. Remember Wal-Mart...
A low beta doesn't
a stock won't budge.
, which sport a beta of just 0.34, have still managed to rise more
than 20% since bottoming out last summer. That's due to slightly
better operating trends, especially in the retailer's grocery
2. Health care is seemingly safe
A number of drug and medical device companies are in this group.
Companies such as
Abbott Labs (
Watson Pharmaceuticals (
Amgen (Nasdaq: AMGN)
Gilead Sciences (Nasdaq: GILD)
Baxter International (
all have a beta below 0.5, largely due to the fact that they have a
high degree of recurring revenue and rarely tend to deliver
quarterly results far from the consensus forecasts. They all trade
for around 10 times earnings, which is well below the broader
market's multiple, which is closer to 15.
3. Steer clear of defense and for-profit education
The list of low-beta stocks also carries a lot of defense sector
and for-profit education stocks. Each of these groups faces real
headwinds and may see limited (or even negative) sales growth in
coming years. In this instance, the low beta tells you that these
stocks are likely dead money -- at best.
4. The winners
So what's left? You'll note a handful of insurers on the list,
Hanover Insurance (THG)
Aon Corp. (NYSE:
. These could all prove to have solid upside if the economy gets
much better, as pricing becomes less competitive in this business
when an economy expands. Their low betas mean these insurers are
unlikely to fall much if the economy slips backward, either.
Perhaps my favorite name on this table is
Archer Daniels Midland (ADM)
, which may soon come out of a multi-year phase of operational
challenges. Many of this agricultural processor's divisions have
been caught on the wrong end of the cycle, crushing
margins in the process. The company's
margins have fallen 200 basis points in the past six years to just
4.5% in fiscal (June) 2011. Yet analysts at Citigroup think the
company "...is in store for sequentially improving profits across
the majority of its businesses over the coming quarters, with the
exception of ethanol." They see earnings per share rising from
$2.60 in fiscal 2012 to $3.25 in fiscal 2013 and $3.50 in fiscal
Shares of ADM have hovered right around the $30 mark during the
past three years, but that earnings strength could finally move the
stock up toward the $40 mark.
I also think investors continue to overlook a solid current
that is underway at tax prep firm
H&R Block (HRB)
. [I also
wrote about this
back in January.] I am not expecting an overly-robust tax season
for the company, but I think the company's long-term strategy
Risks to Consider:
A low beta wouldn't necessarily keep these stocks from falling
in a down market. If that happens, then you'd likely need to focus
on negative beta stocks that move in the opposite direction of the
Action to Take -->
The rising market doesn't mean you should sell your stocks. But
replacing high-beta stocks in your portfolio with low-beta stocks
should provide a buffer of comfort if the market turns choppy. Any
of the stocks I mentioned above are a good place to start
If you haven't heard about this unique opportunity, then I want to
tell you about it now. StreetAuthority has staked me with $100,000
of real money to invest in my absolute best ideas. For a limited
time, you'll be able to follow along with me completely free.
Go here to learn more
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of ABT, GILD in one or more if its "real money"