Stocks with the Lowest Beta (Volatility)

Fundamental

Volatility has been a significant factor in the trading activity over the last couple of weeks. The result is that the market moves are better compared to a roller coaster, which has kept investors on the edge of their seats. June may bring about a reduction in this fear gauge, but following that the seasonal tendencies reveal a rising volatility index through July and August. So, is there a way to buffer ourselves from these market movements?

Fortunately there is an measure 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 the summer, the expectation is that the market will show it’s up and downs, with sustained strength to make its appearance during the Fall months for what will hopefully be a nice rally to finish the year. 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 tip toe into the market to benefit from market lows, yet remain cushioned from the daily swings.

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 1.27. Canadian markets (TSE Composite) reveal stocks with an average beta of 1.22. 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 –0.35 for financial company Fairfax Holdings (FFH.TO) to 3.84 for a financial company AIG (AIG). Only 3 stocks on the list of investments analyzed have betas less than 0 (FFH.TO, WN.TO and APOL). Each of these three show positive seasonal tendencies through to July.

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 30 are as follows:

Canadian Utilities Limited (CU.TO) – Company Beta: 0.1 – Industry Beta: 0.65 – Sector Beta: 0.22
Maple Leaf Foods Inc. (MFI.TO) – Company Beta: 0.11 – Industry Beta: 0.46 – Sector Beta: 0.56
Family Dollar Stores Inc (FDO) – Company Beta: 0.16 – Industry Beta: 0.62 – Sector Beta: 0.99
Peoples United Financial Inc (PBCT) – Company Beta: 0.16 – Industry Beta: 1.22 – Sector Beta: 1.17
Emera Inc. (EMA.TO) – Company Beta: 0.19 – Industry Beta: 0.16 – Sector Beta: 0.22
Manitoba Telecom Services (MBT.TO) – Company Beta: 0.19 – Industry Beta: 0.49 – Sector Beta: 0.48
DeVry Inc (DV) – Company Beta: 0.23 – Industry Beta: 0.38 – Sector Beta: 0.56
Abbott Laboratories (ABT) – Company Beta: 0.24 – Industry Beta: 0.66 – Sector Beta: 0.63
Fortis Incorporated (FTS.TO) – Company Beta: 0.24 – Industry Beta: 0.16 – Sector Beta: 0.22
General Mills Inc (GIS) – Company Beta: 0.25 – Industry Beta: 0.46 – Sector Beta: 0.56
Wal-Mart Stores Inc (WMT) – Company Beta: 0.25 – Industry Beta: 0.62 – Sector Beta: 0.99
Genzyme Corp (GENZ) – Company Beta: 0.26 – Industry Beta: 0.65 – Sector Beta: 0.63
Saputo Inc. (SAP.TO) – Company Beta: 0.26 – Industry Beta: 0.46 – Sector Beta: 0.56
Archer-Daniels-Midland Co (ADM) – Company Beta: 0.28 – Industry Beta: 0.46 – Sector Beta: 0.56
C.R. Bard Inc (BCR) – Company Beta: 0.28 – Industry Beta: 1.09 – Sector Beta: 0.63
Kroger Co (KR) – Company Beta: 0.29 – Industry Beta: 0.63 – Sector Beta: 0.56
Laurentian Bank of Canada (LB.TO) – Company Beta: 0.29 – Industry Beta: 1.22 – Sector Beta: 1.17
Hershey Co (HSY) – Company Beta: 0.3 – Industry Beta: 0.46 – Sector Beta: 0.56
Consolidated Edison Inc (ED) – Company Beta: 0.32 – Industry Beta: 0.65 – Sector Beta: 0.22
Loblaw Companies Limited (L.TO) – Company Beta: 0.34 – Industry Beta: 0.63 – Sector Beta: 0.56
Thomson Reuters Corporation (TRI.TO) – Company Beta: 0.34 – Industry Beta: 0.79 – Sector Beta: 1.17
Campbell Soup Co (CPB) – Company Beta: 0.35 – Industry Beta: 0.46 – Sector Beta: 0.56
PG&E Corp (PCG) – Company Beta: 0.36 – Industry Beta: 0.65 – Sector Beta: 0.22
RONA Inc. (RON.TO) – Company Beta: 0.36 – Industry Beta: 0.73 – Sector Beta: 0.99
Southern Company (SO) – Company Beta: 0.37 – Industry Beta: 0.16 – Sector Beta: 0.22
Stericycle Inc (SRCL) – Company Beta: 0.37 – Industry Beta: 0.75 – Sector Beta: 1.13
Altria Group Inc (MO) – Company Beta: 0.38 – Industry Beta: 0.72 – Sector Beta: 0.56
Nicor Inc (GAS) – Company Beta: 0.39 – Industry Beta: 0.43 – Sector Beta: 0.22
Gilead Sciences Inc (GILD) – Company Beta: 0.39 – Industry Beta: 0.65 – Sector Beta: 0.63
Hormel Foods Corp (HRL) – Company Beta: 0.39 – Industry Beta: 0.46 – 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 are hedged to cyclical market movements.

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