Updated on April 27th, 2021 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
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. Target Corporation (TGT)
Target is a retail giant that consists of about 1,850 big box stores, which offer general merchandise and food. Target reported fourth quarter and full year earnings on March 2nd, 2021 with results easily beating estimates on both the top and bottom lines. Target capped what ended up being a blockbuster 2020 with another very strong performance in the critical fourth quarter.
Adjusted earnings–per–share came to $2.67 in Q4, which was roughly 67% higher than the same period a year ago. Revenue soared as well, up 21% to end the quarter at $28.3 billion, beating expectations by nearly a billion dollars. Comparable sales were up a staggering 20.5% in Q4, reflecting traffic growth of 6.5% and average ticket size of +13.1%. Store comparable sales were up 6.9%, while digital comparable sales more than doubled year–over–year.
Same–day services, which include Order Pick Up, Drive Up, and Shipt, grew 212% during Q4 with Drive Up growing more than 500%
Target has increased its dividend for 49 consecutive years, placing it on the exclusive list of Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index with 25+ years of dividend increases. You can see the entire Dividend Aristocrats list here.
TGT has a 5-year Beta score of 0.52.
4. Johnson & Johnson (JNJ)
J&J is a global healthcare giant. It has a market capitalization above $400 billion, and generates annual revenue of more than $81 billion. Today, J&J manufactures and sells health care products through three main segments: Pharmaceuticals, Medical Devices, and Consumer health products.
It has a diversified business model, with strong brands across its three core operating segments. A breakdown of each segment’s performance can be seen in the image below:
Source: Investor Presentation
On 4/20/2020, Johnson & Johnson announced first-quarter earnings results for the period ending 3/31/2021. Revenue grew 7.9% to $22.3billion, beating estimates by $280 million. Adjusted earnings–per–share of $2.59 was a $0.29, or 12.6%, improvement from the prior year and was $0.24 better than expected. Pharmaceutical sales grew 9.6%, driven by a 18.5% increase in oncology.
J&J has increased its dividend for 58 consecutive years, making it a Dividend King.
JNJ has a 5-year Beta of 0.50.
3. Costco Wholesale (COST)
Costco is a diversified warehouse retailer that operates about 800 warehouses that collectively generate about $186 billion in annual sales. Costco reported second quarter earnings on March 4th, 2021 and as is customary for the retail giant, it beat expectations on both the top and bottom lines.
Total sales increased nearly 15% year–over–year to $44.8 billion, beating expectations by more than a billion dollars. The company also released February sales figures, the latter half of which weren’t part of the second quarter given Costco’s unusual fiscal year reporting schedule; February sales were $14.05 billion, up 15% year–over–year.
For the first half of the year, net sales came to $93.2 billion, up 15% year–over–year.Costco saw adjusted comparable sales come in at +12.6% in the US, which strips out forex translation and gasoline revenue. E–commerce revenue soared 75% in Q2, continuing the company’s run of outstanding digital sales growth, having invested in that during the pandemic and seeing the payoff. International sales were up nearly 18% in Q2 as well, so Costco is firing on all cylinders.
Costco has a 5-year Beta score of 0.49.
2. Procter & Gamble (PG)
Procter & Gamble is a consumer products giant that sells its products in over 180 countries. Notable brands include Pampers, Luvs, Tide, Gain, Bounty, Charmin, Puffs, Gillette, Head & Shoulders, Old Spice, Dawn, Febreze, Swiffer, Crest, Oral–B, Scope, Olay and many more. The company generated $71 billion in sales in fiscal 2020.
Procter & Gamble has paid a dividend for 131 years and increased its dividend for 65 consecutive years –one of the longest active streaks of any company. On April 13th, 2021 Procter & Gamble increased its dividend 10.0% to $0.8698 per quarter from $0.7907.
On April 20th, 2021 Procter & Gamble released Q3 fiscal year 2021 results for the period ending March 31st, 2021 (Procter & Gamble’s fiscal year ends June 30th.) For the quarter,the company generated $18.1 billion in sales, a 5.2% increase compared to Q3 2020. This result was led by sales increases of 9%, 4%, 4%, and 8% in the company’s Beauty, Grooming, Health Care and Fabric & Home Care segments, respectively.
Net earnings equaled $3.269 billion or $1.26 per share compared to $2.917 billion or $1.12 per share in Q3 2020. In addition, Procter & Gamble maintained its fiscal 2021 guidance, anticipating 5% to 6% sales growth and 8% to 10% core earnings–per–share growth.
P&G has a 5-year Beta of 0.48.
1. Walmart Inc. (WMT)
Walmart traces 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 $500 billion this year.
Walmart reported fourth quarter and full year earnings on February 18th, 2021. Revenue was up a very impressive 7.3% to $152 billion during the quarter, driven by continued pandemic–fueled changes in consumer behaviors. Total comparable sales soared 8.5% in Q4, easily beating expectations. Walmart US, the largest segment, was up 8.6%, while Sam’s Club saw a staggering 10.8% gain ex–fuel.
Walmart has a 5-year Beta of 0.36.
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.
Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected]