Updated on April 20th, 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. Corteva, Inc. (CTVA)
Corteva was spun off from former parent company DowDuPont in 2019. It is an agriculture sciences company, with a revenue split of approximately 55%-45% between seeds and chemicals. Its seeds portfolio consists of 65% corn, 20% soybeans, and a collection of other products accounting for the remaining 15%. The chemicals portfolio is comprised of 50% herbicides, 25% insecticides, 20% fungicides, and 5% from other products.
Corteva has a long-term growth catalyst in the form of the rising global population, and the corresponding need for food. Feeding the world will be a major challenge going forward, as the global population is expected to reach nearly 10 billion by 2050.
The company generated annual sales of $13.8 billion in 2019, a 3% decline in organic sales from the previous year. Merger cost synergies were approximately $350 million for 2019, and the company remains on track to deliver $1.2 billion by 2021. These cost savings free up cash flow for shareholder returns. Corteva returned approximately $220 million to shareholders in 2019. Corteva has a 5-year Beta score of 0.03.
We currently do not cover Corteva in the Sure Analysis Research Database.
4. Healthpeak Properties (PEAK)
Healthpeak Properties is formerly known as HCP. On October 30, 2019, HCP changed its name to Healthpeak Properties, and its ticker from HCP to PEAK, in order to reflect the culmination of its efforts to reform its portfolio. Healthpeak Properties is the largest healthcare Real Estate Investment Trust in the U.S., with 740 properties. It invests in life science facilities, senior houses, and medical offices, with 97% of its portfolio based on private-pay sources.
Healthpeak Properties benefits from favorable secular trends. As the baby boomer generation ages and the average life expectancy is on the rise, the senior population of the U.S. is expected to grow significantly in the upcoming years. The 80+ age group is expected to grow 23% from 2018 to 2025 and 56% by 2030. In addition, this age group has immense spending power, as its average net worth exceeds $640,000. Thanks to these trends, healthcare spending in the U.S. is expected to grow 72%, from $3.2 trillion in 2018 to $5.5 trillion in 2025.
Healthpeak Properties has posted declining FFO for four consecutive years. The REIT ran into trouble in 2015, when a major tenant was sued for Medicare claims fraud. As a result, the REIT incurred a $1.3 billion asset impairment charge and has been going through a major restructuring. However, Healthpeak Properties has sold several assets and has used the proceeds to reduce its debt. Healthpeak has a 5-year Beta score of 0.25.
3. Kroger Co. (KR)
Founded in 1883, Kroger is the largest supermarket chain in the U.S. The company has over 2,700 retail stores under a variety of brand names, 1,500 fuel centers, 2,200 pharmacies and 250 fine jewelry stores in 35 states. The company serves more than 60 million households every year.
The competition in the retail sector has heated up with Amazon (AMZN) and Walmart (WMT) expanding grocery delivery service. Kroger, which has successfully responded to the competition so far, initiated a strategic plan called “Restock Kroger,” which aims to increase its operating income by $400 million by 2020 by maximizing its efficiency and its cost savings.
On March 5th, 2020 Kroger reported Q4 and full-year results for the period ending February 1st, 2020. For the year Kroger generated $122.3 billion in sales, up from $121.9 billion in 2018, with total sales excluding fuel and dispositions growing 2.3% year-over-year. Adjusted earnings-per-share totaled $2.19 – within prior guidance – compared to $2.11 in 2018, for growth of 3.8%. Kroger has a 5-year Beta of 0.33.
2. Newmont Corporation (NEM)
Newmont Corporation operates gold and copper mines on four different continents. The company was founded in 1916 as a holding company for investments in mineral, oil and gas properties. It has been listed on the NYSE since 1940. The company is among the biggest publicly traded gold miners, generating more than $10 billion in annual revenues.
Newmont completed its merger with Goldcorp in April of 2019, creating the world’s largest gold producer by market value, output, and reserves. Newmont reported its fourth quarter earnings results on February 20. Revenues during the third quarter totaled $2.97 billion, which represents growth of 45% compared to the previous year’s quarter. The acquisition of Goldcorp had a large impact on the company’s reported revenues.
The company’s gold production rose to 1.83 million ounces, which was up 27% year-over-year, while higher average selling prices explain why total revenues grew at a much faster pace than production volumes. Newmont’s all-in sustaining costs were $946 per ounce.
Earnings-per-share came in at $0.50 during the fourth quarter, which was slightly above the average analyst estimate, as the analyst community had forecasted adjusted earnings-per-share of $0.48. Newmont has a 5-year Beta of 0.35.
1. The Clorox Company (CLX)
Clorox is a manufacturer and marketer of consumer and professional products, spanning a wide array of categories from charcoal to cleaning supplies to salad dressing. The company was founded in 1913 and generates annual revenue above $6 billion. Just a few of its core brands include Clorox bleach and cleaning products, Pine-Sol, Liquid-Plumr, Fresh Step, Glad, Kingsford, Hidden Valley, Brita, Burt’s Bees, RenewLife, and more.
Clorox recently reported its operating results for its second fiscal quarter, and while revenue came in right at consensus estimates, earnings managed a slight beat. Total revenue was down 2% for the quarter, but this was due to foreign exchange. Organic sales came in flat year-over-year. Gross margins were up 40 basis points to 44.1% in the quarter, primarily attributable to cost saving initiatives and price increases. Earnings-per-share increased 4.3% for the quarter.
Clorox has increased its dividend for 42 consecutive years. It is a Dividend Aristocrat, a group of 66 stocks in the S&P 500 Index with at least 25 consecutive years of dividend raises.
Its long-term dividend growth is thanks to its durable competitive advantages, namely its leadership position in its core industry. More than 80% of its revenue comes from products that are #1 or #2 in their categories across the globe. Such strong brands provide the company with consistent demand, as well as the ability to raise prices over time. Clorox has a 5-year Beta score of 0.37.
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.