Updated on October 28th, 2020 by Bob Ciura
In the world of investing, volatility matters. Investors are reminded of this every time there is a downturn in the broader market and individual stocks that are more volatile than others experience enormous swings in price.
Volatility is a proxy for risk; more volatility generally means a riskier portfolio. The volatility of a security or portfolio against a benchmark is called Beta.
In short, Beta is measured via a formula that calculates the price risk of a security or portfolio against a benchmark, which is typically the broader market as measured by the S&P 500.
Here’s how to read stock betas:
- A beta of 1.0 means the stock moves equally with the S&P 500
- A beta of 2.0 means the stock moves twice as much as the S&P 500
- A beta of 0.0 means the stocks moves don’t correlate with the S&P 500
- A beta of -1.0 means the stock moves precisely opposite the S&P 500
Interestingly, low beta stocks have historically outperformed the market… But more on that later.
You can download a spreadsheet of the 100 lowest beta stocks (along with important financial metrics like price-to-earnings ratios and dividend yields) below:
This article will discuss beta more thoroughly, why low-beta stocks tend to outperform, and provide a discussion of the 5 lowest-beta stocks in the Sure Analysis Research Database. The table of contents below allows for easy navigation.
Table of Contents
- The Evidence for Low Beta Outperformance
- How To Calculate Beta
- Beta & The Capital Asset Pricing Model (CAPM)
- Analysis On The 5 Lowest-Beta Stocks
- Final Thoughts
The Evidence for Low Beta Outperformance
Beta is helpful in understanding the overall price risk level for investors during market downturns in particular. The lower the Beta value, the less volatility the stock or portfolio should exhibit against the benchmark. This is beneficial for investors for obvious reasons, particularly those that are close to or already in retirement, as drawdowns should be relatively limited against the benchmark.
Importantly, low or high Beta simply measures the size of the moves a security makes; it does not mean necessarily that the price of the security stays nearly constant. Indeed, securities can be low Beta and still be caught in long-term downtrends, so this is simply one more tool investors can use when building a portfolio.
The conventional wisdom would suggest that lower Beta stocks should underperform the broader markets during uptrends and outperform during downtrends, offering investors lower prospective returns in exchange for lower risk.
However, history would suggest that simply isn’t the case. Indeed, this paper from Harvard Business School suggests that not only do low Beta stocks not underperform the broader market over time – including all market conditions – they actually outperform.
A long-term study wherein the stocks with the lowest 30% of Beta scores in the US were pitted against stocks with the highest 30% of Beta scores suggested that low Beta stocks outperform by several percentage points annually.
Over time, this sort of outperformance can mean the difference between a comfortable retirement and having to continue working. While low Beta stocks aren’t a panacea, the case for their outperformance over time – and with lower risk – is quite compelling.
How To Calculate Beta
The formula to calculate a security’s Beta is fairly straightforward. The result, expressed as a number, shows the security’s tendency to move with the benchmark.
For example, a Beta value of 1.0 means that the security in question should move in lockstep with the benchmark. A Beta of 2.0 means that moves in the security should be twice as large in magnitude as the benchmark and in the same direction, while a negative Beta means that movements in the security and benchmark tend to move in opposite directions or are negatively correlated.
In other words, negatively correlated securities would be expected to rise when the overall market falls, or vice versa. A small value of Beta (something less than 1.0) indicates a stock that moves in the same direction as the benchmark, but with smaller relative changes.
Here’s a look at the formula:
The numerator is the covariance of the asset in question with the market, while the denominator is the variance of the market. These complicated-sounding variables aren’t actually that difficult to compute – especially in Excel.
Additionally, Beta can also be calculated as the correlation coefficient of the security in question and the market, multiplied by the security’s standard deviation divided by the market’s standard deviation.
Finally, there’s a greatly simplified way to calculate Beta by manipulating the capital asset pricing model formula (more on Beta and the capital asset pricing model later in this article).
Here’s an example of the data you’ll need to calculate Beta:
- Risk-free rate (typically Treasuries at least two years out)
- Your asset’s rate of return over some period (typically one year to five years)
- Your benchmark’s rate of return over the same period as the asset
To show how to use these variables to do the calculation of Beta, we’ll assume a risk-free rate of 2%, our stock’s rate of return of 7% and the benchmark’s rate of return of 8%.
You start by subtracting the risk-free rate of return from both the security in question and the benchmark. In this case, our asset’s rate of return net of the risk-free rate would be 5% (7% – 2%). The same calculation for the benchmark would yield 6% (8% – 2%).
These two numbers – 5% and 6%, respectively – are the numerator and denominator for the Beta formula. Five divided by six yields a value of 0.83, and that is the Beta for this hypothetical security. On average, we’d expect an asset with this Beta value to be 83% as volatile as the benchmark.
Thinking about it another way, this asset should be about 17% less volatile than the benchmark while still having its expected returns correlated in the same direction.
Beta & The Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model, or CAPM, is a common investing formula that utilizes the Beta calculation to account for the time value of money as well as the risk-adjusted returns expected for a particular asset.
Beta is an essential component of the CAPM because without it, riskier securities would appear more favorable to prospective investors as their risk wouldn’t be accounted for in the calculation.
The CAPM formula is as follows:
The variables are defined as:
- ERi = Expected return of investment
- Rf = Risk-free rate
- βi = Beta of the investment
- ERm = Expected return of market
The risk-free rate is the same as in the Beta formula, while the Beta that you’ve already calculated is simply placed into the CAPM formula. The expected return of the market (or benchmark) is placed into the parentheses with the market risk premium, which is also from the Beta formula. This is the expected benchmark’s return minus the risk-free rate.
To continue our example, here is how the CAPM actually works:
ER = 2% + 0.83(8% – 2%)
In this case, our security has an expected return of 6.98% against an expected benchmark return of 8%. That may be okay depending upon the investor’s goals as the security in question should experience less volatility than the market thanks to its Beta of less than 1. While the CAPM certainly isn’t perfect, it is relatively easy to calculate and gives investors a means of comparison between two investment alternatives.
Now, we’ll take a look at five stocks that not only offer investors low Beta scores, but attractive prospective returns as well.
Analysis On The 5 Lowest-Beta Stocks
The following 5 stocks have the lowest (but positive) Beta values, in ascending order from lowest to highest. We focused on Betas above 0, as we are still looking for stocks that are positively correlated with the broader market:
5. Costco Wholesale (COST)
Costco is a diversified warehouse retailer that operates about 800 warehouses that collectively generate about $170 billion in annual sales. Costco reported fourth quarter and full-year earnings on September 24th, with results coming in ahead of expectations on both the top and bottom lines. Total sales for the quarter were up 12.5% year-over-year to $53.3 billion, and for the year, sales rose 9.3% to $163 billion. Comparable sales were up 11% in the US in the fourth quarter, and up 13.6% when adjusted for forex and gasoline sales.
For the year, that same metric was up 8.1% and 9.2%, respectively. E-commerce sales nearly doubled in Q4, rising 91% year-over-year, and were up 50% for the year. Membership fee revenue was up less than 6% in Q4, which is somewhat lower than recent performances from Costco. Earnings came to $9.02 per share for the fiscal year, up sharply from $8.26 in the prior year.
Campbell has a 5-year Beta score of 0.61.
4. Becton, Dickinson & Company (BDX)
Becton, Dickinson & Company is a global leader in the medical supply industry. The company was founded in 1897 and has almost 50,000 employees across 190 countries. The company generates around$17 billion in annual revenue, with approximately 45% of revenues coming from outside the United States. Becton, Dickinson & Company is on the exclusive list of Dividend Aristocrats. You can see all 65 Dividend Aristocrats here.
BD has been very active on the acquisition front in recent years. In 2015, the company acquired CareFusion, a leading supplier of diagnostic products and medical devices. BD completed its $24 billion purchase of C.R. Bard at the end of 2017. After the Bard acquisition, BD is now composed of three segments. Products sold by the Medical Division include needles for drug delivery systems,and surgical blades. The Life Sciences division provides products for the collection and transportation of diagnostic specimens. The Intervention segment includes several of the products produced by Bard.
On 8/6/2020, BD released earnings results for the third quarter of fiscal 2020. Revenue declined 11.4% to $3.9 billion, $107 million below expectations. Adjusted earnings-per-share decreased $0.88, or 29%, to $2.20, though this was $0.13 higher than expected. Much of the decline for both revenue and earnings was due to lower demand for products related to the COIVD-19 pandemic.
Though the company did see some added benefit related to COVID-19, BD estimates that the pandemic reduced quarterly sales by a net $600 million. BD has received orders totaling 470 million injection devices to deliver a COVID-19 vaccine. The company expects to deliver the majority of orders in fiscal year 2021. BD reinstated guidance for the remainder of the year and now expects adjusted earnings-per-share of $9.80 to $10.00 for fiscal 2020.
BDX has a 5-year Beta of 0.57.
3. Verizon Communications (VZ)
Verizon is the largest telecommunications company in the United States by market capitalization. Verizon is a mega-cap stock with a market cap above $250 billion. Verizon is a diversified telecommunications provider of wireless, broadband, and cable. The company’s wireless network covers ~300 million people and 98% of the United States.
As a major telecom, Verizon has not been immune from the coronavirus pandemic but the impact has been relatively muted. Verizon released earnings results for the third quarter on 10/21/2020. Revenue fell 4.1% to $31.5 billion, missing estimates by $100 million. Adjusted earnings-per-share of $1.25 matched last year’s result, but was $0.03 higher than expected.
Verizon had a total of 553K retail postpaid net additions, including 428K postpaid smartphone net additions, compared to estimates of 311K postpaid net additions. Churn remains very low. Wireless retail postpaid churn was 0.89% while retail postpaid phone churn was 0.69%. For the full year, Verizon management has issued guidance which calls for flat adjusted earnings-per-share at the midpoint of the forecast.
Verizon has a 5-year Beta score of 0.54.
2. Walmart Inc. (WMT)
Walmar ttraces its roots back to 1945 when Sam Walton opened his first discount store. The company has since grown into the largest retailer in the world, serving nearly 300 million customers each week. Revenue will be in excess of $545 billion this year.
Walmart reported second quarter earnings on August 18th, with results coming in much better than expected on the top and bottom lines. Comparable sales were up 9.3% in the US, beating consensus by nearly half. E-commerce sales were up a staggering 97% from the comparable period last year as the company’s heavy push into digital channels continues to pay off. Transaction volumes declined -14% in Q2, but the average ticket size soared 27%.
Sam’s Club saw comparable sales rise in the US by 13%, doubling consensus, while International sales fell once again, this time declining -6.8%. The international business was weak due to Flipkart’s closing in India, as well as forex. Adjusted earnings-per-share came to $1.56 on very strong revenue gains, and we’ve boosted our estimate of earnings-per-share for this year to $5.35.
Walmart has a 5-year Beta of 0.52.
1. Gilead Sciences (GILD)
Gilead Sciences is a biotechnology company that operates with a clear focus on antiviral medication and treatments. Its main products include treatments for HIV, Hepatitis B, and Hepatitis C (HBV/HCV), but Gilead has also ventured into other areas such as oncology. Gilead is a large-cap stock with a market cap above $70 billion.
Gilead stock has performed poorly to begin 2020, under-performing the broader S&P 500 Index by approximately 15 percentage points year-to-date. At the same time, the company has performed relatively well, given the extremely weak global economy due to the coronavirus pandemic. Through the first half of 2020, Gilead’s revenue fell just 2.5%, a fairly modest decline all things considered.
Gilead’s sales fell 10% in the second quarter, but treatment starts for patients were down across the healthcare sector. Still, the company remains highly profitable and a cash-generating machine. Gilead generated $3.68 billion of free cash flow over the first two quarters of 2020, an increase of 5% from $3.5 billion in the first half of 2020.
2020 is likely to be a year of stability for Gilead. The company forecasts revenues of $24 billion, and earnings-per-share in a range of $6.25 to $7.65.
Gilead has a 5-year Beta of 0.50.
Investors must take risk into account when selecting from prospective investments. After all, if two securities are otherwise similar in terms of expected returns but one offers a much lower Beta, the investor would do well to select the low Beta security as they may offer better risk-adjusted returns.
Using Beta can help investors determine which securities will produce more volatility than the broader market and which ones may help diversify a portfolio, such as the ones listed here.
The five stocks we’ve looked at not only offer low Beta scores, but they also offer attractive dividend yields. Sifting through the immense number of stocks available for purchase to investors using criteria like these can help investors find the best stocks to suit their needs.