Nowadays, the market is tied more closely than ever to the political stage. European rumors earlier this week demonstrated the political stronghold on the markets, which wobbled back and forth at each announcement, especially those relating to French banks and Greek debt.
Levels of market correlation have been reaching new highs thanks to the prevalence of Exchange-traded funds and high frequency algorithmic trading-a strategy that leads investors to trade very large groups of stocks regardless of fundamentals of the individual companies. This type of "algo-trading" has accounted for nearly 70%, and recently up to 80% of market volume. (via Kapitall)
"The Chicago Board Options Exchange S&P 500 Implied Correlation Index has jumped 35 percent since the end of July to 80.15 at 11:42 a.m. New York time, and reached 81.52 on Sept. 14, the highest level ever," according to Bloomberg.
As a result, a great number of companies on U.S. stock markets are moving in step with the European's debt crisis -- even the companies distantly connected with it. Bloomberg reports that U.S. options traders are "placing record bets that equities move in lockstep in reaction to Europe's debt crisis."
Heavy correlations make it extremely difficult for traders and hedge fund managers to find reliable benchmarks and determine the relative value of companies. Returns have been even more difficult to predict than usual, and often hurt by the market volatiles that have blanketed stock indexes.
The feeling of some traders is well summed up by Scott Billeadeau of Fifth Third Asset Management in an interview with Bloomberg: "Europe is a big macro issue and it's so pervasive that at the top of investors' minds, there's nothing to do with individual companies. I'm just buying stocks or I'm selling stocks, versus buying IBM and selling Hewlett-Packard."
So how can you find stocks that aren't highly correlated to the overall market? One way is to look at the beta indicator.
A beta is a measurement of how a stock has behaved relative to the market in the past. It's often a useful predictor for future performance, although past performance is of course no guarantee of future results. Companies with low betas imply a low correlation to the overall changes in the market.
For example, a beta of 1 indicates the stock has generally moved in tandem with the market. Ex: When the market rose by 2%, the stock rose by 2% as well. A beta between zero and 1 means the stock has generally been less volatile than the market (less risk for investors). Ex: When a beta is 0.5-50% less volatile than the market -- if the market rose by 2%, the stock generally rose by 1%. When the market dropped by 2%, the stock generally dropped by only 1%.
So we're wondering: Which low-beta stocks might be appealing for your portfolio?
To help you get started, we collected data on profitability ratios, and identified a list of highly profitable, low-beta stocks. We searched for companies below 0.50.
To further refine the quality of our list, we collected data on institutional money flows, and identified the stocks that have seen the biggest institutional inflows over the last quarter.
Big money managers think there's more upside to these profitable low-beta stocks -- do you agree?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
2. Campbell Soup
3. Northwest Natural Gas
4. Western Gas Partners
List compiled by Eben Esterhuizen.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Data sourced from Fidelity.
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