Stocks with the Least Correlation to Market ups and downs

Fundamental

Markets in the last 48 hours have seen a decline of 1.21% that subsequently turned into a gain of 0.97% the day following. February has a history of showing these ups and downs, but ultimately revealing little to no gains. So, is there a way to buffer ourselves from these market movements?

Fortunately there is an number that identifies the relation of the returns of a stock to the market as a whole. Welcome to the world of Beta. And no, I know what you’re thinking, we’re not talking about software testing. We are talking about the degree to which a stock reacts when the market shifts, either up or down. How it works is stocks with a beta of 0 generally have no correlation to market movements and subsequently stocks with betas of 1 generally move one-for-one with market activity. Below, in-between, and above these levels are the direct and indirect relationships that details the extent to which the investment will react.

A stock with a negative beta will generally move in an inverse relationship to the market action and positive betas will generally move in a direct relationship. So, how can we use this to invest?

For the rest of February and even into March, the expectation is that the market will show it’s up and downs, with sustained strength to make its appearance in a few weeks time as investors focus on the growth prospects present in the marketplace. Therefore, the expectation is not a decline, or at least not significantly so in the broad scheme of things. However, market volatility may be seen, as we have witnessed in the past two days. Identifying investments with betas that fall between 0, no correlation to the market, and 1, direct correlation with the market, will provide us with the opportunity to stay invested to benefit from market gains while the doubt in the market fades.

What betas can we expect to see?

Out of all of the stocks on the S&P 500, the average beta as it currently stands, according to data obtained through Reuters, is 1.20. Canadian markets (TSE Composite) reveal stocks with an average beta of 1.25. Therefore, as the market moves, the stocks within these core indices tend to move more significantly than the rest of the investments available to be traded. The betas range from –0.29 for a financial company in the Canadian markets (FFH.TO) to 3.99 for a financial company in the US markets (AIG). Only 3 stocks on the list of investments analyzed have betas less than 0 (FFH.TO, WN.TO and APOL).

What stocks are least correlated with market ups and downs, yet will still benefit from market gains?

In this scenario we are seeking investments with betas that are positive, but closest to 0 to avoid volatile market movements. The top 20 are as follows:

CDN UTILITIES CLASS’A'COM NON-V (CU.TO) – Company Beta: 0.06 – Industry Beta: 0.67 – Sector Beta: 0.22
People’s United Financial, Inc. (PBCT) – Company Beta: 0.11 – Industry Beta: 1.23 – Sector Beta: 1.25
FAMILY DOLLAR STORES (FDO) – Company Beta: 0.13 – Industry Beta: 0.77 – Sector Beta: 0.99
MANITOBA TELECOM S COM NPV (MBT.TO) – Company Beta: 0.13 – Industry Beta: 0.55 – Sector Beta: 0.51
MAPLE LEAF FOODS COM NPV (MFI.TO) – Company Beta: 0.14 – Industry Beta: 0.5 – Sector Beta: 0.56
DEVRY INC (DV) – Company Beta: 0.15 – Industry Beta: 0.33 – Sector Beta: 0.56
ABBOTT LABORATORIES (ABT) – Company Beta: 0.19 – Industry Beta: 0.68 – Sector Beta: 0.65
EMERA INC COM NPV (EMA.TO) – Company Beta: 0.21 – Industry Beta: 0.17 – Sector Beta: 0.22
BARD C R INC (BCR) – Company Beta: 0.22 – Industry Beta: 0.61 – Sector Beta: 0.65
FORTIS INC COM NPV (FTS.TO) – Company Beta: 0.22 – Industry Beta: 0.17 – Sector Beta: 0.22
WAL MART STORES (WMT) – Company Beta: 0.24 – Industry Beta: 0.83 – Sector Beta: 0.99
THE HERSHEY COMPANY (HSY) – Company Beta: 0.26 – Industry Beta: 0.5 – Sector Beta: 0.56
LAURENTIAN BNK CDA COM CAD1 (LB.TO) – Company Beta: 0.26 – Industry Beta: 1.23 – Sector Beta: 1.25
Genzyme Corporation (GENZ) – Company Beta: 0.27 – Industry Beta: 0.64 – Sector Beta: 0.65
SAPUTO INC (SAP.TO) – Company Beta: 0.28 – Industry Beta: 0.5 – Sector Beta: 0.56
GEN MILLS INC (GIS) – Company Beta: 0.29 – Industry Beta: 0.5 – Sector Beta: 0.56
CONS EDISON INC (ED) – Company Beta: 0.3 – Industry Beta: 0.17 – Sector Beta: 0.22
ARCHER DANIELS MDLND (ADM) – Company Beta: 0.31 – Industry Beta: 0.5 – Sector Beta: 0.56
CAMPBELL SOUP CO (CPB) – Company Beta: 0.33 – Industry Beta: 0.5 – Sector Beta: 0.56
KROGER CO (KR) – Company Beta: 0.33 – Industry Beta: 0.62 – Sector Beta: 0.56

Much of the stocks that you see on this list are ones you would come to expect with low volatility, the consumer staples and utilities. Seasonality reveals that these are the safest investments to hide your money when markets are indecisive in terms of direction, particularly during the summer months. The consumer staples include Campbell Soup and General Mills, among others. Utilities include Consolidated Edison and Canadian Utilities Limited, topping the list. These sectors are viewed as necessities, and not subject to cyclical market movements.

As always, do your research to determine if these investments are suitable for you.