We’re all familiar with the term “sleeping well at night.” It’s a broad phrase that can have many different meanings for different people. For me, low beta stocks help me “sleep well at night.” What exactly is a low beta stock? In its simplest definition beta is a measure of the volatility of a stock, essentially, how “wild” a stock is. Does it have wide price swings or is it a “quieter” stock and does not move as much on a day to day basis.
For the purposes of stock investing we can assume that a stock with a beta of 1 moves with the market in general. A stock with a beta greater than 1 implies that the move will be more volatile than the market in general. A stock with a beta of less than 1 will move less in relation to the market and be less volatile. Basically, you should view a beta number as your appetite for risk. Higher beta numbers indicate a potential for a higher rate of return while a low beta number offers you lower risk with a lower potential reward. The classic high/low risk high/low reward mantra.
With that introduction, let’s take a look at some incredibly high beta stocks that have tremendous volatility. First up is Housing Finance Company of Kenya . This mortgage house that is soon to restructure has a beta of 1.32. The beta is in theory 32% more volatile than the market in general.
Next up is Equity Bank . This indigenous bank which recently posted a 25.9% increase to Kshs.11.2 billion for Q3 2014 has a beta of 1.47. Now we are getting into some serious volatility with regard to stock price. As the number suggests Equity is in theory 47% more volatile than the market. The stock trades at a 2.9% dividend yield and spots a 3.63 Price to book value.
Now on the other end of the beta spectrum, we have the so-called low beta investments. These “boring” stocks I am referring to are well known for minimal price swings and thus are considered low beta stocks.
First off, we have Total Kenya, which is an oil company that markets and distributes petroleum fuels and lubricants and related products and services to industry, transport, commercial and domestic users throughout Kenya. The stock offers patient investors a2.26% dividend yield and a beta of 0.44.
Next up, we have CFC Stanbic Bank . The bank spots the lowest P/E ratio in the sector at 9.33 and a beta of 0.30. Theoretically, this is another “perfect stock” for traders uncomfortable with wild price gyrations.
Finally, we have Carbacid . An investment and holding company involved in mining and sale of Carbon dioxide. The stocks sports a beta of 0.14 which means this stock has a theoretical volatility that is 14% of the market. This means whenever the market trends lower, Carbacid would move 14% lower.Good stock for a defensive portfolio.
Clearly, low beta stocks do not provide a lot of action for stock traders. If you are the type of trader who likes to go to bed at night knowing that, as a whole, my stock portfolio trends to a lower beta figure, then these are the type of stocks you should be hunting for.
Of course, beta figures are one small part of general pricing for stocks and any number of surprises (bad earnings, buyout offers, etc.) can cause even low beta stocks to move more than usual. In addition, every sector has its own beta number and must be evaluated within that particular sector much like PE ratio numbers. In other words, beta numbers are not absolute and therefore you cannot simply compare one beta of a particular stock with a beta number of another stock in a totally different sector.