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Surviving Market Volatility: 3 Low Beta Stocks to Consider
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Wall Street’s history is littered with boom-and-bust stories of investors who got overly aggressive and went on to blow up their accounts later. Legendary commodities trader Ed Seykota once famously warned “There are old traders and there are bold traders, but there are no old, bold traders.” The quote is a simple but valuable reminder that investing is a game of longevity, not a game of boom and bust.
What makes investing so tricky is trying to balance greed (wanting to make money) with fear (preserving money). Like the weather, the market environment is constantly changing. There are uptrends, down trends, and sideways, choppy markets. For most investors with experience, uptrends and downtrends become evident after a while. Investors may use moving averages or trendlines to identify them and get on board and follow the direction of the trend. However, the most difficult to identify is a rangebound market. Rangebound markets, like the one we’re in currently, have a way of sucking investors into trades and causing stop outs (death by a thousand cuts). These markets are the most dangerous of them all.
Image Source: Zacks Investment Research
Pictured: A 6 month chart of the Nasdaq 100 ETF (QQQ) shows how choppy the market has been.
Below are 3 tips for surviving these problematic markets:
· Patience: In fast markets, it’s best to slow down. In other words, sometimes, the name of the game is capital preservation rather than appreciation. Ted Williams became one of the most prolific batters in baseball history by patiently waiting for his pitch. Lions will quietly stalk their prey for hours before pouncing. As an investor, you always have the option of waiting or trading less until you get a more favorable environment. Wait for the fat pitch.
· Size Matters: The only true risk management parameter in the stock market is position size. If you are oversized in a position and the market or position you are in gaps down overnight, you are in for a bad day. During times of volatility, it is best to decrease position size. By reducing position size, you can better withstand the increase in volatility. Remember, you can always add to a stock later if the market’s volatility decreases.
· Slow and Steady Win the Race: If you decide to invest in a volatile market, it is best to stick with steady, low-beta names. Beta measures a stock’s volatility relative to the overall market. A beta of 1 signals that the stock moves in tandem with the market. A beta above one means that the stock tends to move more than the market, while a beta below 1 means it moves less than the market. For example, if a stock has a beta of 1.4, it means that the stock moves 40% more than the market. All else being equal, low-beta stocks are less risky than high-beta stocks.
Here are 3 stocks to help fight the current market volatility:
Caterpillar (CAT - Free Report) is a nearly $120 billion global construction and mining equipment manufacturer known for its iconic yellow machines. Caterpillar is attractive in this environment because it has a 1.14 beta, a healthy 2.08% dividend, and holds a high Zack’s Ranking of 2. CAT has the benefit of being in a strong industry group. The Manufacturing – Construction and Mining Group is ranked 15 out of the 248 groups tracked by Zacks.
Image Source: Zacks Investment Research
Pictured: CAT's set up to have a strong 2023.
Deere & Co (DE - Free Report) is the world’s largest manufacturer of agricultural equipment. Like CAT, DE has a large market capitalization ($128 billion), a low beta (1.09), and Zack’s Ranking of 2. Since the pandemic crash, agricultural equipment has been in high demand, and Deere’s stock and fundamentals have benefitted as a result. The fact and the matter is that agriculture is a staple in the global economy and as a result, this veteran company will continue to benefit. Last quarter, DE grew EPS by 81% on revenue growth of 37% - an impressive feat for a company of its size. Investors would be hard-pressed to find a more dominant company in its space.
Image Source: Zacks Investment Research
Pictured: DE's return on equity is more than double that of its peers.
Few businesses are as steady as Philip Morris International (PM - Free Report) . Philip Morris manufactures cigarettes and recently has entered the smoke-free, reduced-risk products category. While PM holds a mediocre Zack’s Rank of 3, the stock is the quintessential steady mover. The stock has a beta of just 0.70, which means it tends to swing less than the general market. Furthermore, PM pays a generous dividend of 5.02%. Though it won’t ever likely produce multi-bag gains in a year any time soon, the stock is an excellent place to park capital until the storm passes over.
Image Source: Zacks Investment Research
Pictured: Despite PM's low beta, the stock has outperformed the S&P 500 in recent months.
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Surviving Market Volatility: 3 Low Beta Stocks to Consider
Wall Street’s history is littered with boom-and-bust stories of investors who got overly aggressive and went on to blow up their accounts later. Legendary commodities trader Ed Seykota once famously warned “There are old traders and there are bold traders, but there are no old, bold traders.” The quote is a simple but valuable reminder that investing is a game of longevity, not a game of boom and bust.
What makes investing so tricky is trying to balance greed (wanting to make money) with fear (preserving money). Like the weather, the market environment is constantly changing. There are uptrends, down trends, and sideways, choppy markets. For most investors with experience, uptrends and downtrends become evident after a while. Investors may use moving averages or trendlines to identify them and get on board and follow the direction of the trend. However, the most difficult to identify is a rangebound market. Rangebound markets, like the one we’re in currently, have a way of sucking investors into trades and causing stop outs (death by a thousand cuts). These markets are the most dangerous of them all.
Image Source: Zacks Investment Research
Pictured: A 6 month chart of the Nasdaq 100 ETF (QQQ) shows how choppy the market has been.
Below are 3 tips for surviving these problematic markets:
· Patience: In fast markets, it’s best to slow down. In other words, sometimes, the name of the game is capital preservation rather than appreciation. Ted Williams became one of the most prolific batters in baseball history by patiently waiting for his pitch. Lions will quietly stalk their prey for hours before pouncing. As an investor, you always have the option of waiting or trading less until you get a more favorable environment. Wait for the fat pitch.
· Size Matters: The only true risk management parameter in the stock market is position size. If you are oversized in a position and the market or position you are in gaps down overnight, you are in for a bad day. During times of volatility, it is best to decrease position size. By reducing position size, you can better withstand the increase in volatility. Remember, you can always add to a stock later if the market’s volatility decreases.
· Slow and Steady Win the Race: If you decide to invest in a volatile market, it is best to stick with steady, low-beta names. Beta measures a stock’s volatility relative to the overall market. A beta of 1 signals that the stock moves in tandem with the market. A beta above one means that the stock tends to move more than the market, while a beta below 1 means it moves less than the market. For example, if a stock has a beta of 1.4, it means that the stock moves 40% more than the market. All else being equal, low-beta stocks are less risky than high-beta stocks.
Here are 3 stocks to help fight the current market volatility:
Caterpillar (CAT - Free Report) is a nearly $120 billion global construction and mining equipment manufacturer known for its iconic yellow machines. Caterpillar is attractive in this environment because it has a 1.14 beta, a healthy 2.08% dividend, and holds a high Zack’s Ranking of 2. CAT has the benefit of being in a strong industry group. The Manufacturing – Construction and Mining Group is ranked 15 out of the 248 groups tracked by Zacks.
Image Source: Zacks Investment Research
Pictured: CAT's set up to have a strong 2023.
Deere & Co (DE - Free Report) is the world’s largest manufacturer of agricultural equipment. Like CAT, DE has a large market capitalization ($128 billion), a low beta (1.09), and Zack’s Ranking of 2. Since the pandemic crash, agricultural equipment has been in high demand, and Deere’s stock and fundamentals have benefitted as a result. The fact and the matter is that agriculture is a staple in the global economy and as a result, this veteran company will continue to benefit. Last quarter, DE grew EPS by 81% on revenue growth of 37% - an impressive feat for a company of its size. Investors would be hard-pressed to find a more dominant company in its space.
Image Source: Zacks Investment Research
Pictured: DE's return on equity is more than double that of its peers.
Few businesses are as steady as Philip Morris International (PM - Free Report) . Philip Morris manufactures cigarettes and recently has entered the smoke-free, reduced-risk products category. While PM holds a mediocre Zack’s Rank of 3, the stock is the quintessential steady mover. The stock has a beta of just 0.70, which means it tends to swing less than the general market. Furthermore, PM pays a generous dividend of 5.02%. Though it won’t ever likely produce multi-bag gains in a year any time soon, the stock is an excellent place to park capital until the storm passes over.
Image Source: Zacks Investment Research
Pictured: Despite PM's low beta, the stock has outperformed the S&P 500 in recent months.