We’re all familiar with the term “sleeping well at night.” It’s a broad phrase that can have many different meanings for different people. For me, low beta stocks help me “sleep well at night.” What exactly is a low beta stock? In its simplest definition beta is a measure of the volatility of a stock, essentially, how “wild” a stock is. Does it have wide price swings or is it a “quieter” stock and does not move as much on a day to day basis.
For the purposes of stock investing we can assume that a stock with a beta of 1 moves with the market in general. A stock with a beta greater than 1 implies that the move will be more volatile than the market in general. A stock with a beta of less than 1 will move less in relation to the market and be less volatile. Basically, you should view a beta number as your appetite for risk. Higher beta numbers indicate a potential for a higher rate of return while a low beta number offers you lower risk with a lower potential reward. The classic high/low risk high/low reward mantra.
Of course the beta of a stock is simply one measurement that can determine a stocks volatility and should not be the only measure used when making an investment decision.
An example of low beta stocks include many utility companies because of their low growth prospects and steady income while many high beta stocks are in the technology sector with a high concentration of dot coms. Of course, every sector has its own beta number and must be evaluated within that particular sector much like PE ratio numbers. In other words, beta numbers are not absolute and therefore you cannot simply compare one beta of a particular stock with a beta number of another stock in a totally different sector.
Now let’s take a look at some incredibly high beta stocks that have tremendous volatility and wide price swings. For the purpose of this post I will focus on the technology sector.
First up Tesla Motors, Inc. (TSLA). A very cool car company that nonetheless has been hyped up in the media recently with their announcement of building new factories for their batteries, car sales and a string of car fires that rocked the headlines. TSLA with a beta of 1.37 is in theory 37% more volatile than the market in general.
Next up is Facebook, Inc. (FB) the social network of the day that garners a lot of the media headlines has a beta of 1.77. Now we are getting into some serious volatility with regard to stock price, and as we all have seen from the time FB went public it’s stock price has been on a wild ride.
Now for the heavy hitting beta stocks. Seen any good movies lately on Netflix, Inc. (NFLX)? This stock has a beta of 2.07. All you have to do is look at NFLX’s price chart since the company went public and you will see wide price swings in action. Classic high beta at its best. As the number suggests NFLX is in theory 207% more volatile than the market in general. If you like wide price gyrations then this is the stock for you.
One other very high beta stock I want to share with you is Yelp, Inc. (YELP). This stock has a beta of 2.76 which no doubt will leave you with that roller coaster feeling after you experience all the ups and downs. One thing is for sure, this stock is no snoozer. Better keep an eye on it as all times.
On the other end of the beta spectrum, I have lined my portfolio with a few “rudder” investments which I have discussed in a previous post. These “boring” stocks I am referring to are my three utilities which are well known for minimal price swings and thus are considered low beta stocks. They are Southern Company (SO), Consolidated Edison (ED), and Dominion Resources, (D).
First off, we have Southern Company. An electric utility that operates primarily in the south of the U.S. The company is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. While not a gang-buster for forward growth, as most utilities are, it does sport a nice 4.50% yield with a 12 plus year history of dividend growth. Boring, perhaps. Consistent high yield, yes. Low beta… definitely at only 0.01 which translates into a theoretical volatility relative to the market of just 1%.
Next we have Consolidated Edison (ED) an electric, gas, and steam delivery businesses serving New York City and environs. Consolidated Edison sports hefty 4.33% yield with an impressive 39 years of dividend growth and a beta of -0.03 which means this stock has a theoretical volatility of an inverse 3%. Which means as the market trends lower, ED would trend a little higher.
Finally, we have Dominion Resources, (D) which is another utility that produces and transports energy primarily on the east coast of the U.S. D offers patient investors a nice 3.30% yield with about 5 years of dividend increases and a beta of 0.01 like SO.
Clearly, low beta stocks do not provide a lot of action for stock traders but this is how I like it. I’m not looking for wild price gyrations where a stock can have tremendous price swings. I like going to bed at night knowing that, as a whole, my stock portfolio trends to a lower beta figure which means I won’t be waking up to many surprises. Of course, beta figures are one small part of general pricing for stocks and any number of surprises (bad earnings, buyout offers, etc.) can cause even low beta stocks to move more than usual. But as a whole, as can be seen with the examples I gave, it is the tech sector that has the high beta, high price swings and the utilities that are the stable low beta low price swing stocks that I generally like.
What about your portfolio? Are they filled with high or low beta stocks or a blend of both? What do you prefer?
Disclosure: Long SO, ED, D