- Low Beta Stocks
- How Do Low Beta Stocks Tend to Be Calculated?
- Beta and the Capital Asset Pricing Model
- Why Do Traders Use Beta in the Overall Market?
- Why Should You Choose Low Beta Stocks in the Broader Market?
- Disadvantages of Innovative Beta Strategies
- Top 6 Low Beta Stocks
- Final Thoughts
- Frequently Asked Questions
Low Beta Stocks
The stock market is unpredictable. In one minute, the price of a stock can go up, and it hits an all-time low in the next. As an investor, you need to analyze the market well to know which stocks you should buy or sell. But how can you do it effectively?
To achieve this, investors assess the risks related to a particular stock. Now, it is pretty challenging to evaluate the price risk of a specific stock. Analyzing it and making the correct decision is even more difficult. But there is an indicator that can statistically measure the risk of a stock. This indicator is known as the beta. You will often hear investors use this to indicate a stock’s risk profile. Though it has some limits, it’s still a great way to analyze the market.
How Do Low Beta Stocks Tend to Be Calculated?
Volatility is the most essential factor in the world of trading. Whenever the broader market takes a downfall, the volatile stocks have a giant swing in price. The higher the volatility, the more risky the portfolio is. Mainly you measure the beta by calculating the volatility of a stock
So, how can you calculate beta stocks? Well, the beta calculation is quite simple. You have to calculate the price of a portfolio against a particular benchmark. This benchmark is mainly measured by the S&P 500.
A beta of 1.0 indicates the stock will move equally with the S&P 500. It means that the stock price will correlate and move in the same direction as the S&P 500. A beta of 2.0 means the stock will move twice. These are all positive correlations.
A beta of 0 means there is zero correlations with the S&P 500. It means the S&P has no impact on the price movement of the stock. A beta of -1.0 indicates the store and the S&P have a negative correlation. The two variables move in opposite directions. Low beta stocks have seen to outperform in the broader market.
Beta and the Capital Asset Pricing Model
The beta and the capital asset pricing model go hand in hand. The CAPM or capital asset pricing model is a trading formula that uses the beta to calculate the time value and risks of an asset. Beta is a crucial part of CAPM because riskier assets will look like favorable ones without the utilization of beta. So, investors will invest in them without knowing their downfalls it.
CAPM isn’t necessarily the most accurate measurement, but it’s still a viable way to compare and contrast two alternatives. It gives you a good idea about the risks of a particular stock in the market.
Why Do Traders Use Beta in the Overall Market?
As we’ve mentioned before, beta is helpful in understanding the risk level of stock. In market downturns, there is always a risk of loss. With beta, you can measure the risk profile. When the beta value is low, the volatility of the stock is more diminutive. Therefore, it is more beneficial for the investors.
Traditionally, lower beta stocks are thought to underperform in the uptrend and outperform in the downtrends in the broader markets. But this is not entirely true. A study suggests that beta stocks will outperform no matter what the market condition is.
In an interesting study, researchers compared the lowest 30 percent of the beta scores in the USA to the highest 30 percent of beta scores. With surprise, they noticed that common beta stocks outperformed significantly in an annual period.
Why Should You Choose Low Beta Stocks in the Broader Market?
Beta is a clear-cut measurement technique that gives an overall analysis of the market risks. Sure they are some limitations when the market index and period are taken into account. But still, it’s a viable approach. Low beta stocks are great for several reasons. So, let’s take a look at the reasons why you should choose common beta stocks.
Performance
Traders invest in the market with a single thing on their minds. That is achieving high profit. When they fail to get it, their sorrows know no bound. There are a plethora of stocks you can invest in. Some have high volatility while others have low. The secret for successful investments is the low volatility of the stocks. And this is why common beta stocks outperform in the stock market. It even exceeds in post-financial crisis.
Stability
The price of High beta stocks like real estate fluctuates a lot. In a falling market, they tend to perform very severely while they perform exceptionally well in a rising market. Low beta stocks like FMCG and Pharma may not rise like the high beta stocks. But they never fall too much as well. Therefore, there is always price stability.
Less Risk
Low beta stocks seem to have less amount of systematic risk. Therefore, you can trade without having to worry about blowing your whole capital.
Disadvantages of Innovative Beta Strategies
Smart beta strategies seem costly and sometimes show inadequate performance. Traditional index funds have minimal costs. But with smart-beta funds, you have a much higher expense ratio and turnover over of portfolio. The very famous proverb “high risk, high reward” has always been associated with trading. This is what happens in the smart beta strategy
Top 6 Low Beta Stocks
Now that we’ve got some rudimentary idea about how low beta stocks work let’s look at the top 6 low beta stocks. These stocks do not just have low volatility. They also guarantee high returns. You can think of investing in them. But before you do, make sure you research over each stock extensively.
Also Read: How To Make Money In Stocks
Quest Diagnostics (DGS)
One sector never dies. That is the healthcare sector. Millions of people need healthcare facilities all around the world. Prevention and treatment of diseases don’t come in cheap. That’s why this industry keeps on flourishing.
As you can assume from the name, this low beta stock on our list operates in the healthcare department. It is a gigantic company that generates more than 9 billion dollars in annual revenue. The earnings of the company are increasing at a rapid rate. In the second quarter revenues of Quest diagnostics, the stock rose about 40 percent.
As it has a large market, Quest diagnostics has a competitive advantage. That’s why the company estimates that it will grow at a 2 percent to 3 percent annual rate. Currently, the company has a 5-year beta score of 0.23
M. Smucker
It's a packaged food-making company that has a beta score of 0.33. Currently, the overall market value of J.M Smucker is about 12 billion dollars. Yes, the number is enormous. But what makes this stock’s beta score so low?
Well, no matter what the economic condition is, you will always need groceries and food. Some people even stock it for an extended period in case an outbreak happens. That’s why the market has low volatility. At the moment, the company has a healthy dividend yield of 3.3 percent.
Walmart
We all have heard of the name. Walmart is our go-to place for buying all sorts of accessories. In this pandemic era, we can’t go out to buy the things we need every day. That’s why we think of storing medication, groceries. It's the reason why Walmart has low volatility
At the moment, Walmart has a five-year beta of 0.43. This means it has a very loose correlation with S&P 500. The change in S&P 500 won’t affect the stock much.
Also, the eCommerce side of Walmart has seen tremendous growth. The company is also investing in large markets like India. Flipkart, a Walmart-owned company, has managed to raise 3.6 billion dollars to enhance the eCommerce growth in India.
Walmart has a vast geographic footprint. It is in every corner of each state. The supplies are coming, and there is an abundance of consumers. That’s why WMT is a low beta stock. It is undoubtedly going to deliver cash flows and continue to grow steadily.
McDonald’s (MCD)
MCD stock currently has a beta score of 0.62. The dividend yield is also just 2.11 percent. You may be wondering how the stock has such attractive dividend yields? Well, the fast-food industry has seen an outburst globally. People are deviating from eating fast foods than homemade food. You can just call McDonald’s, and the food will be at your door.
It is the main reason for McDonald’s astonishing growth. The company’s digital services as well the delivery system is on point. Because of customer satisfaction, the sales numbers are getting high.
Now there are about 30000 restaurants that offer home delivery. Also, the mobile app currently has 40 million users.
Another reason for their success is innovation. They are constantly changing the menus and opening new restaurants globally. That’s why the customers are never tired of their products. They are also signing deals with major financial corporations, which are boosting their sales even further.
Market data suggests that the company has a cash flow visibility of 8.4 billion dollars. Many investors determine that It is enough to sustain dividends for the next decade.
AstraZeneca (AZN)
The AZN individual stocks perhaps have the lowest beta score on the list. The stock’s beta score is just 0.24. That’s why do not hesitate to add this low volatility stock to your portfolio. If you don’t, then you are missing out. Currently, the company has a dividend yield of 0.246 percent. So, what are you waiting for?
The main reason why this stock is going so well is because of the covid 19 vaccine development. The company was one of the frontrunners of the vaccine development process and other big names like Moderna and Pfizer. Their vaccine has not just turn out to be effective but storing it is also much easier than the other two.
Other than this, the company is making tons of next generations medicines. Currently, the company has over 22 candidates that are in phase three. They are sure that all of this will go into the next phase without any complications. Because of the Covid vaccine, AstraZeneca now has a global appeal. Everybody has at least heard about the name of the company. Because of the company's global presence, it is operating a cash flow of 1.9 billion dollars just for the last quarter. With this cash flow, they can fund their research and development divisions. As a result, more revolutionary drugs will come and take over the market. These drugs will continue to make AstraZeneca a leading company in the healthcare department.
Clorox
Yet another company has seen a massive boost because of the coronavirus outbreak. The name of the company is Clorox.
The coronavirus is spreading like wildfire. Researchers all over the world are trying their level best to tackle this virus. They are researching in laboratories. But the main criteria is to conduct the experiments in a sterile environment. It means there can be no contamination, and this is where Clorox comes in. It is a disinfectant that sterilizes types of equipment and everything around you. It keeps the surroundings clean. Therefore, the coronavirus can’t spread and becomes ineffective.
Since the covid 19 outbreak, CLX has seen a considerable boost. After performing underwhelming for a long time, CLX is now performing outstandingly. Currently, the company has a dividend yield of 2.5 percent. The total market value is 21.2 billion. With a beta score of 0.34, you can think of investing it. It can be highly profitable.
Final Thoughts
The stock market is always highly volatile. There are tons of systematic risks along the way. Whenever you think of investing, you have to also think about the chances of loss. It is the reason why many traders back away. But there are trades like low beta stocks that have low volatility. Few risks are associating with them.
So, you don’t have to worry too much. Just pick a stock with a low beta score and invest in it. Soon, the low volatility stock will perform well, and you will be rolling in cash.
Also Read: Power Hour Stocks
Frequently Asked Questions
• How to calculate a stock’s beta?
To calculate a stock’s beta, you have to divide the return’s standard deviation of security by the deviation of benchmark. The result is then multiplied by the benchmark and security’s returns’ correlation.
• What is the meaning of beta of 1?
It means that the price of the security will move along with the stock market. When the beta is greater than 1, it means that the price is more volatile than the market. If it’s less than 1, then the price is less volatile.
• Is low beta good for stocks?
As beta indicates the volatility of the stock, lower beta means that the stock isn’t volatile as the market. If the company is well-managed and has a good reputation, having lower beta is beneficial to many extent
• Is buying high beta stocks riskier than low beta stocks?
High beta stocks tend to be volatile. They provide a better return of investment than low beta stocks, but buying high beta stocks is riskier as well. As they’re quite volatile, the price tends to drop with the market.
