Financial risk is typically defined as the likelihood of permanent loss of capital, and financial planners often use beta -- which measures a stock's price volatility compared to a benchmark such as the S&P 500 -- as a proxy for risk. And while beta can be a helpful metric if you're looking for less volatile stocks, it's not perfect, and it may not help you avoid the risks that can cripple a company and cause serious losses. Also, every investor must factor their investing time frame into the equation.
After all, it's the volatility of stocks that drives the potential for long-term returns. Just because a stock can be volatile in the short term doesn't mean it's necessarily a high-risk investment over the long term. If you're looking for stocks with a balance of both good long-term prospects and lower risk of permanent capital losses, consider these three companies: infrastructure asset partnership Brookfield Infrastructure Partners L.P. (NYSE:BIP), CVS Health Corp (NYSE:CVS), and First Solar, Inc. (NASDAQ:FSLR).
Keep reading to learn why low-risk investors should consider these stocks.
Easily ignored (but critically important) assets make this a great low-risk investment
When it comes to limiting risk, a few key things are important: High barriers to competitive entry, predictable sources of cash flows, and relative resistance to the effects of economic recession. Brookfield Infrastructure Partners is in very good shape with all of these things.
Brookfield Infrastructure is a pure-play way to invest in energy transmission and storage, toll roads, port terminals, gas transportation, rail, and communications-infrastructure assets around the world. The partnership is diversified across geography and industry, helping insulate it from exposure to risk factors in one country or industry.
Furthermore, the way the company's cash flows are structured is another safety factor. The majority of its cash flows are either from regulated utilities or long-term contracts, adding a significant measure of predictability. Many are also structured to increase with inflation, making sure that investors will continue to benefit from those cash flows over time.
Brookfield Infrastructure is also a great value today, trading at 13.2 times cash from operations and only 10.4 times funds from operations per share. As a master limited partnership (also called MLP), Brookfield Infrastructure is not an ideal holding for retirement accounts because of the potential tax consequences, and should generally be owned only in taxable accounts. But with a dividend currently yielding 4% and management planning to grow payouts at near-double-digit rates for the long term, Brookfield is an ideal low-risk income investment.
A long-term trend that can help keep your portfolio healthy
Shares of CVS Health have taken a bit of a beating over the past couple of years, and now trade almost 30% down from their peak. But if you're looking for a company to own for the long term, CVS deserves a look.
CVS is working through some short-term challenges, including a contract loss that was a big driver behind last quarter's profit decline. But looking at the bigger picture, the company's expansion into more parts of healthcare, combined with the growth of America's older population, bode well for it's long-term future.
CVS is primarily known for its retail and mail-order pharmacy business, but there's more to the story. CVS has expanded into healthcare services, primarily with its MinuteClinic small in-pharmacy (and some Target locations) health clinics. Through the end of the first quarter, CVS operated 1,125 MinuteClinics in 33 states and sees plenty of long-term growth for this business.
With its shares trading for 16 times the low end of 2017 earnings guidance at recent prices, CVS is a solid value today. Add in a 2.3% dividend yield, and there's a lot investors should like with CVS, both now and for the long term.
The future is bright for this solar leader (and its balance sheet makes it lower risk)
Considering how much First Solar's stock price has been whipsawed over the past several years, it may seem nuts to call such a volatile stock "low risk." This is a case where investors must look past the stock-price movement and consider the quality of the business, and how the market currently is valuing it.
Right now, First Solar -- which is a leader in the solar-panel industry with, by far, the strongest balance sheet -- is pretty cheap. Furthermore, the prospects for the solar industry remain very good, with decades of growth ahead of it.
What makes First Solar a smart stock for low-risk investors? First, its leading thin-film technology is entrenched in the utility-scale solar segment. First Solar's panels provide some of the best efficiency in extreme environments, where other panels can struggle to produce as much electricity. And considering that utility-scale solar installations are often in places like deserts or other harsh environments, the company has a major edge.
Second, First Solar's balance sheet has it in an incredibly good position right now. The solar industry is in a cyclical "pause," as global demand takes a breather after several years of hard-and-fast investment in large-scale solar projects. And with $2.45 billion in cash and short-term investment on hand, First Solar is actually taking the opportunity to accelerate development of its next generation of panels, with the goal of bringing them to market in 2018.
In other words, while most of the world's panel makers are slashing spending just to ride out the downturn, First Solar is able to spend money to add to its competitive edge when the cycle turns back to growth. First Solar's business is very safe, with a strong economic moat and technology edge. If you're willing to invest for the long term and ride out the stock's volatility, First Solar should be on your radar, even if you consider yourself a low-risk investor.
Jason Hall owns shares of Brookfield Infrastructure Partners and First Solar. Jason Hall has the following options: long January 2018 $45 calls on First Solar. The Motley Fool recommends Brookfield Infrastructure Partners and CVS Health. The Motley Fool has a disclosure policy.