Grandma Got Run Over by John Deere

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The term 'grandma stock' is used to describe defensive stocks that most commonly consist of companies that produce reliable consumer staples. The companies generally fare well regardless of market and general economic conditions because their goods are always in demand. While farm equipment is not something that the general public thinks of as a necessary purchase, the long-term performance of farm equipment manufacturers like Deere & Company (NYSE: DE  ) , AGCO (NYSE: AGCO  ) , and Caterpillar (NYSE: CAT  ) give insight into how these stocks may fit into retirement portfolios.

Grandma needs some stability
The wishlist for a quality grandma stock is short, as it really just includes a company with low volatility and performance that is mostly recession-proof. The largest companies in the farm machinery industry perform somewhat differently as measured by those parameters.

The idea of analyzing volatility might bring fears of cringe-inducing statistics to investors, but as with most major financial calculations, measures of volatility are readily available from investing websites and online brokerages.

A commonly used and easily understood measure of volatility is a stock's 'beta' relative to some index. A stock with a beta equal to 1 has roughly the same volatility of the index to which it is being compared, whereas a beta greater than 1 indicates that the stock sees more price variation than the index, and a beta less than 1 indicates that the stock sees less price variation than the index. As an over-generalization, companies with a low beta won't see as big of dips and peaks as a company with a larger beta.

When nearing retirement, investors typically do not want a portfolio with investments that may see major fluctuations, hence the requirement of grandma stocks to have relatively low betas. In the world of farm equipment John Deere is rather stable, boasting a beta of 1.48 compared with AGCO's beta of 1.88 and Caterpillar's 1.97. While John Deere may be a consistent company in its own industry, it is wildly volatile when compared with quintessential grandma stocks like Campbell Soup Company (NYSE: CPB  ) .

As most of the population knows, and as is explicit in their name, Campbell's produces canned soup. Demand for $0.98 chicken noodle soup does not change drastically during recessions nor during economic booms. In turn, Campbell's has a minuscule beta of only 0.36. Grandma can invest in Campbell's and not worry that her bingo winnings will be lost to the market.

When times get rough
During the recession five years ago, measurements of volatility were put to a test that can be used to clearly show different companies' responses to economic conditions. Investigating returns over the recession period starting in December of 2007 and carrying on through June of 2009 gives direct insight into why grandma stocks and companies with low betas make sense for investors with more fixed incomes.

DE Total Return Price Chart

DE Total Return Price data by YCharts

Assuming the worst case scenario in which an investor bought into the company at its highest price and sold at the lowest price during the period, the data make sense of the assigned betas for each company. In such a scenario, the high beta companies Caterpillar, AGCO, and John Deere saw declines between 72%-78%, while low-beta Campbell's dropped only 37%, compared with the S&P 500 benchmark, which saw a max drop of 52%.

The takeaway
As part of a balanced portfolio for the rest of the investing public, farm equipment manufacturers are worth consideration as global agriculture becomes more dependent on larger farms that require more substantive and expensive equipment.

Individual stocks, however, are rarely the best option for very conservative, retired investors. John Deere, as well as the other major farm equipment manufacturers, should not be the major component of your portfolio if you are nearing or already enjoying retirement, due solely to their volatility relative to the rest of the market. In general, grandma should look to more stable investments.

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Related Tickers

9/30/2016 4:02 PM
AGCO $49.32 Up +1.49 +3.12%
AGCO CAPS Rating: ****
CAT $88.77 Up +1.30 +1.49%
Caterpillar CAPS Rating: ***
CPB $54.70 Up +0.32 +0.59%
Campbell Soup CAPS Rating: **
DE $85.35 Up +1.49 +1.78%
John Deere CAPS Rating: ***