3 Reasons to Seek Out More Stable Stocks

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Stability is something that's arguably not at the forefront of investors' minds at the moment. With 2013 being such a great year for the stock market, it seems as though many market participants are very much in "risk-on" mode and are keeping both eyes firmly fixed on growth prospects and whether a company can hit that all-important double-digit growth rate.

However, the large fall in the S&P 500 on Friday could be a timely reminder that markets don't always go up, and, as such, it could be the case that investors begin to seek out one or two more stable companies in case the market trades sideways or experiences a further dip.

So what is stability? Of course, different investors will have different viewpoints on what defines a stable company, but it could be reasonably expected that a stable company has a good track record of delivering profits, because this could indicate that it is more likely to continue to have a healthy bottom line -- even if economic conditions worsen in future years.

In addition, a stable company should have a relatively generous yield, so that if capital growth is not forthcoming in the future, investors in the stock can still rely on an income in the form of a dividend with which to pay the bills, or to invest in other stocks at suppressed prices.

Furthermore, a stable business may have a beta of less than 1. This means that it has been less volatile than the wider market over a specific time period (usually six to 12 months) and should, in theory, fall by a smaller amount than the wider market in the future.

Of course, the flip side is that it should (in theory) also gain by less than the market in the future, meaning it should outperform the rest of the index in a downturn but underperform in an upturn.

So here are three businesses in the health-care space that could fit the bill for investors seeking more stable stocks:

1. Pfizer (NYSE: PFE  ) -- over the past four years it has grown revenue at an annualized rate of 5.1%, with profits growing by 5.7% over the same period, as the company was able to grow the top line ahead of its cost base. In addition, it pays a yield of 3.2%, which is well above the S&P 500 yield of 2.2%. Furthermore, Pfizer's beta is 0.8, which further highlights its credentials as a more stable stock.

2. Merck (NYSE: MRK  ) -- although revenue growth has been highly impressive in the past four years (growing by 18.7% per annum), profits have been fairly volatile. Although profits have been made in all years, they have ranged from $1.6 billion to $15.3 billion, thereby highlighting that Merck's performance as a business isn't quite as stable as that of Pfizer. However, as a stock, it offers a lower beta than Pfizer (0.6 versus 0.8) and a slightly higher dividend (3.3% versus 3.2%).

3. Johnson & Johnson (NYSE: JNJ  ) -- although revenue is only slightly higher now than it was four years ago and profits are slightly lower than in 2008, Johnson & Johnson remains among the most stable stocks in the health-care sector, with the historical revenue and profit range being relatively narrow. Its beta of 0.8, combined with a yield of 2.8% (versus the S&P 500 yield of 2.2%), mark it out as a potentially more stable option for risk-conscious investors.

So while 2014 could be another great year for the S&P 500, the events of Friday showed that growth and recovery is not a given. Therefore, keeping an eye on stability could prove to be a worthwhile counter to further market turbulence.

The Motley Fool's best idea for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2810014, ~/Articles/ArticleHandler.aspx, 9/4/2015 5:26:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:00 PM
JNJ $91.31 Down -1.33 -1.44%
Johnson & Johnson CAPS Rating: ****
MRK $51.59 Down -1.06 -2.01%
Merck & Co., Inc. CAPS Rating: ****
PFE $31.37 Down -0.52 -1.63%
Pfizer CAPS Rating: ****