Investment Strategy – Go Overweight On Low Beta Stocks

Introduction

The stock markets in the United States continues to trade near all-time highs. The S&P 500 index currently trades at a price to earnings ratio of 35.1.

While the long-term outlook for equities might still be positive, I believe that valuations are stretched and a correction is impending.

Further, with U.S. elections round the corner, markets can potentially witness high volatility.
Given this scenario, it makes sense to book profits and increase the weight of low beta stocks in the portfolio.

What is Beta?

Beta is a simple, but important concept.

Beta is a measure of the volatility of a stock in relation to the markets.

As a simple example, a high beta stock might decline by 15% if the markets (index) declines by 10%. On the other hand, a low beta stock might decline by just 5% if the markets (index) declines by 10%.

Therefore, low beta stocks help in investor wealth protection when markets are uncertain or trending lower.

What follows is that when the market sentiment is bullish, investors should go overweight on high beta stocks. If the market goes up by 10%, a high beta stock can deliver 15% or 20% returns.

Some Examples of Low Beta Stocks

I also want to provide some examples of low beta stocks in the U.S. markets. These are just examples and not recommendations.

Investors need to do their own research before considering exposure to these stocks.

Lockheed Martin – This stock has a beta of 0.94. A beta of less than 1.0 is an indication of stocks with low volatility. In addition to a low beta, Lockheed Martin offers an annual dividend of $10.40. Income investors might find this stock attractive.

Costco Wholesale – This is an even more defensive name with a beta of just 0.69. The company has strong fundamentals and steady growth visibility. Costco also has an annual dividend of $2.80 per share.

Walmart – This is probably among the least risky stock in the markets. Walmart stock has a beta of just 0.28. In addition, the company has an annual dividend of $2.16.
Overall, companies in mature industries have a low beta as earnings are relatively stable and cash flows are robust.

Conclusion

The S&P 500 index bottomed out at 666 in March 2009 during the financial crisis. In just over a decade, the index has moved higher by 422% and currently trades at 3,483.

With valuations stretched, it makes sense to be cautiously optimistic.