12 Low-Volatility Stocks to Stabilize Your Portfolio

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published 2 October 2020

The stock market suffered a turbulent September, and a number of factors are pointing toward an equally bumpy rest of the year. That likely will have investors looking for a smoother market ride than what the major indices have to offer – and one such way to do that is to buy low-volatility stocks to manage risk.

The upcoming presidential election is a massive point of uncertainty, but it's hardly the only one. The potential for a "second wave" of COVID-19, the state of the U.S. economy, and Chinese relations are all making themselves heard, as well. Most of these factors could continue to haunt U.S. stocks through the end of 2020 – even the presidential election, if the results are contested.

Low-volatility strategies are designed to limit losses during periods of market decline while still allowing for upside. They surged in popularity following the stock market meltdown triggered by the 2008 crisis, and they've long proven able to outperform their benchmarks over long periods. For example, between December 1990 and December 2019, the S&P 500 Low Volatility Index produced a 10.9% average annual return, versus 10.2% for the index itself. The low-vol index also had a return/risk of 0.85 versus 0.58 for the plain index. Extending this history to the 1970s shows a similar risk-return profile.

Just don't consider low-volatility stocks a panacea for whatever ails the market. Over shorter time periods, low-vol stocks have sometimes underperformed, including in 2020. One reason for this is unusual circumstances triggered by the COVID-19 lockdown, which has caused traditionally safe sectors like real estate and utilities to tank as credit markets froze and turned riskier industries (like technology, which could operate remotely, and biotech, which sought answers for COVID-19) into safe havens.

Rather than a single weapon that minimizes losses in every single downturn, investors should look at low-volatility stocks as part of an overall long-term diversification strategy for smoothing market peaks and valleys and bolstering returns over longer periods by losing less. In looking for low-volatility stocks, we've screened the market for stocks that have a low beta – a measure of volatility in which a benchmark is set at 1.0, so stocks with a beta of less than 1.0 are theoretically less volatile than the S&P 500 – over the past two years.

Disclaimer

Data is as of Oct. 1. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in order of beta, from highest to lowest (a lower beta means a stock is theoretically less volatile).

Topics

Stock Watch

Republic Services

Market value: $29.6 billion
Dividend yield: 1.8%
24-month beta: 0.78

None of this precluded RSG from feeling the bite of COVID-19. During the company's June quarter, for instance, COVID-related shutdowns of customers' businesses reduced trash volume and hit sales. But adjusted EPS actually rose by nearly 3% and year-to-date cash flow grew 17%. The company even rewarded investors with a 5% dividend hike – its 15th consecutive year of dividend growth. And shares are in the black by single digits year-to-date.

"We believe that RSG is poised for a continued share price recovery as the U.S. economy recovers," writes Argus Research, which rates the stock at Buy and recently upgraded its 12-month price target from $95 per share to $102. "On valuation, we believe this well-run company deserves to trade at a premium to historical average multiples based on its solid balance sheet, focus on growth through acquisitions, and industry position."

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Cerner

Market value: $22.1 billion
Dividend yield: 1.0%
24-month beta: 0.71

CERN shares are rated Buy or Strong Buy by 11 analysts and Hold by nine – no one has a Sell against Cerner currently. "We view Cerner shares as attractive, given the company's broad customer footprint, strong client satisfaction, robust product line, global sales opportunities, and strong competitive positioning to benefit from the changing U.S. reimbursement environment," write William Blair analysts, who rate the stock at Outperform (equivalent of Buy).

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Johnson & Johnson

Market value: $387.9 billion
Dividend yield: 2.7%
24-month beta: 0.67

Johnson & Johnson (JNJ, $147.32) is a household name in consumer healthcare with iconic over-the-counter products such as Listerine, Tylenol and Neutrogena. The company also has world-class pharmaceutical and medical device businesses and owns blockbuster drugs like Stelara, Xarelto and Imbruvica. JNJ holds the No. 1 or No. 2 market shares worldwide in most product categories. The company has 26 products in its portfolio that each generate over $1 billion in annual sales.

The company is adding blockbuster therapeutics for treating autoimmune disorders to its portfolio via the acquisition of Momenta Pharmaceuticals, which was announced in August. JNJ commenced late-stage clinical trials of its single dose COVID vaccine candidate in September and has already agreed to supply 100 million doses to the U.S. government upon authorization. The government also may purchase an additional 200 million doses under a subsequent agreement.

"Based on our analysis of July and August price-adjusted scrips and rebate-adjusted sales for JNJ's largest U.S. Pharma franchises, trends are tracking roughly in line with our Q3 estimates," write Credit Suisse analysts, which rate the stock at Outperform. "Consistent with our analysis published two weeks ago, better-than-expected growth in Stelara, Erleada and Opsumit, and slower-than-expected declines in Zytiga were partially offset by slower than expected trends in Darzalex, Imbruvica, Prezista, Invega, Simponi/Simponi Aria, Xarelto and Tremfya, relative to our estimates."

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Bristol-Myers Squibb

Market value: $134.8 billion
Dividend yield: 3.0%
24-month beta: 0.66

Drug maker Bristol-Myers Squibb (BMY, $59.82) was transformed by the 2019 acquisition of Celgene, which added treatments for cancer and autoimmune disorders to its drug portfolio. Celgene owned cancer drugs Revlimid, Pomalyst/Imnovid, Abraxane, and Reblozyl and bone marrow disorder treatment Inrebic. BMY already held several blockbuster products in its portfolio, including Eliquis (blood coagulation) and Orencia (for moderate to severe rheumatoid arthritis).

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Costco Wholesale

Market value: $158.2 billion
Dividend yield: 0.8%
24-month beta: 0.66

"We view COST as one of top share winners during the pandemic driven by strength in food & other categories," writes Oliver Chen, who has an Outperform rating on shares and a price target of $410 per share that ranks among the highest expectations on Wall Street. "COST (is) well positioned for continued physical & digital traffic as its core competency is to offer members exceptional value given a fixed markup model. We also believe COST's e-comm investments in talent, infrastructure, & products will drive innovation & loyalty."

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Colgate-Palmolive

Market value: $66.1 billion
Dividend yield: 2.3%
24-month beta: 0.66

Colgate-Palmolive (CL, $77.06) is a consumer products conglomerate with business lines in oral care, personal care, home care and pet nutrition. The company holds a global 40% share of the toothpaste market and a 30% share of the toothbrush market. It does so via iconic brands such as Colgate in dental care, Palmolive, Speed Stick and Irish Spring in personal care, Ajax and Axion in home care and Hill's Science Diet in pet food.

"Relative to HPC peers, CL's portfolio presents a compelling balance of premium innovations and affordable essentials that have demonstrated both volume and price growth during past recessions," say UBS analysts, who rate the stock at Buy. "This defensive diversification coupled with possible LT consumption changes and favorable shelf-reset comps should help offset pressures from H2 pantry deloading."

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Kimberly-Clark

Market value: $50.3 billion
Dividend yield: 2.9%
24-month beta: 0.57

At least one-quarter of the world's population uses Kimberly-Clark products, and the company holds either No. 1 or No. 2 worldwide market shares in diapers, feminine care and bathroom tissue. The pandemic has spurred demand in 2020 for the company's line of KC Professional brands, which include tissues and paper towels designed for away-from-home use, sterile wipes and various other safety products.

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Dollar General

Market value: $52.7 billion
Dividend yield: 0.7%
24-month beta: 0.56

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Verizon Communications

Market value: $246.0 billion
Dividend yield: 4.2%
24-month beta: 0.49

Verizon's EPS declined during the June quarter due to the COVID-related lockdown, which temporarily closed its stores. But Verizon increased free cash flow a whopping 74% in the first half of 2020 to $13.7 billion and also trimmed $5.7 billion from net debt. Also, VZ has cut $7.2 billion from its expenses since 2018, putting it well on track to achieve its goal of $10 billion in cumulative cost savings by 2021.

VZ agreed to acquire Tracfone Wireless in September via a roughly $6.3 billion cash-and-stock buyout. Tracfone, which boasts 90,000 retail locations, is the nation's largest reseller of wireless services at 21 million subscribers. The acquisition expands Verizon's presence in the massive low-cost and value segment. VZ plans to further expand its foothold by in this segment by building up Tracfone's core brands and distribution channels, including its popular Straight Talk wireless plan. The merger should be seamless since more than half (13 million) of Tracfone's customers are already part of Verizon's network.

"The highly defensive change in customer behavior has depressed revenue, but may also freeze industry conditions as most customers stay with their existing carriers," writes Argus Research analyst Joe Bonner, who upgraded VZ shares to Buy in September. "This could be a positive for Verizon as the wireless industry's leading incumbent. As the macro-economy slowly recovers and work-at-home becomes the 'new normal,' connectivity is more critical than ever for both consumer and businesses."

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Kellogg

Market value: $22.1 billion
Dividend yield: 3.5%
24-month beta: 0.46

The company isn't just carbs, however. Kellogg's portfolio of meatless products, marketed under the Morningstar Farms brand, has been a growth driver, too. Kellogg already has the No. 1 veggie burger in the U.S. and plans to transition its entire Morningstar Farms portfolio to 100% vegan by 2021. Kellogg also is getting a boost from robust sales growth in emerging markets of Asia, the Middle East and Africa, led by its cereal and snack food brands.

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Hormel Foods

Market value: $26.6 billion
Dividend yield: 1.9%
24-month beta: 0.45

Hormel's sales rose 4% in the July quarter as a result of strength in its grocery and refrigerated products categories that more than offset COVID-related declines in foodservice sales. The company's EPS growth was flat due to incremental costs related to COVID, but free cash flow grew 72% as a result of strong inventory management. Rising free cash flow supports expectations for continued dividend growth.

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General Mills

Market value: $38.3 billion
Dividend yield: 3.3%
24-month beta: 0.41

COVID-related at-home dining trends contributed to the company's impressive August-quarter performance, which showed organic sales up 10% year-over-year and adjusted EPS rising 27%. Profits improved by 23% year-over-year in fiscal 2020, which ended in May, and General Mills accomplished core goals that included accelerating organic sales growth, maintaining strong margins and reducing leverage. The company also was successful in expanding its share of the U.S. cereal market, improving the performance of its U.S. snack and yogurt business and returning its Canadian operations to growth.