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
10 thoughts on “Low Beta Stocks Help Me Sleep At Night”
I like SO and ED, but they have very high multiples and relatively low yields for utilities. Also when the 10 year rate starts to rise again, you might need some Tylenol PM to fall asleep 🙂
Well, 2014 has been an amazing year for utilities so you may be correct in the assumption that relative to their historical PE’s they currently do have high multiples. Still, they offer tremendous price stability and a relative high yield. Granted it’s not like some of the REITS or MLP’s that many like, but they do have sustainable yields. Thank you for stopping by!
I came across your blog from Mantra’s….Yes low beta for me too, my divi portfolio consists mostly of the low beta shares and mostly of REITS. Bad to have too many eggs in one basket I know, but each REIT operates in a different sector of the property world and each has a different exposure to London. They will never make me a millionaire but but that steady 3 to 4% asset value growth each quarter mounts up quite considerably over the years. In the past I’ve had long periods travelling around and not been able to access my portfolio (I don’t trust internet cafes) low beta is the only way to keep in the game and sleep in a tent 🙂
That’s the point of the blog post… that low beta might not ever make you a millionaire, but it can deliver solid yield without all the volatility. I found it interesting when you said that you had long periods without access to your portfolio because I always say if I were to go to Mars for the next 5 – 10 years and not be able to touch my current portfolio, I would be just fine and still sleep well. Peace of mind is never underrated.
I am long SO..have held it for a couple of years and happy with the yield and DGR rates. Like MDP said, I see some movement in the utilities sector once the bond yields start rising.
Well utilities in general have been high flying this year. Not sure if the public wants some security and high yield instead of the high beta TSLA, TWTR, etc. that have all been rocked in recent times. Thanks for stopping by!
Thanks for the great info. Do you have a maximum beta “cutoff” when looking at stocks? Basically, is there a certain beta number that is a deal-breaker for you?
As you can see from my portfolio I like a lot of stocks that are in general low beta. I do not like wild price swings or action with my stocks. Let TSLA, YELP, FB, TWTR, NFLX or whatever move up and down 10% in a day. Not for me. That being said I generally invest in stocks that have a beta of around 1.0 or lower but if I had to pick an absolute cutoff it would be around 1.3. Remember, these numbers change frequently and if a stock had a recent run up/down the beta will go up. CAT is a great example of having a recent run up (from about $83 to $103 in less than six months) and it’s beta number has increased. This doesn’t make CAT a bad investment rather a little more volatile in recent weeks. A beta number alone, is never reason to buy or sell a stock rather a guide to current volatility.
Thanks for the further explanation. Great info!