It's typically the highly volatile stocks that catch our attention, jumping and dropping sharply over time. We often think that they may serve us best, too, as they seem to have the potential to give our portfolio a big sudden boost. However, you should also consider quiet, low-volatility stocks. Many of them have proven they can surge, too. Better still, many -- as they seem undervalued -- may have plenty of surging to do.
To get a handle on a stock's volatility, investors will frequently look at its "beta," which measures how it moves in relation to the overall market. As an example, iron ore specialist Cliffs Natural Resources sports a beta of 2.28, meaning that if the market advances 10%, it's likely, on average, to advance 2.28 times that, or 22.8%.
Of course, the opposite is true, too. A 20% drop in the market might mean a drop in the neighborhood of 46% for Cliffs. That volatility cuts both ways.
Low-volatility lovelies
On the opposite side of the beta spectrum are low-volatility stocks. It's important to remember that just because they don't move much when the market moves doesn't mean they don't move at all.
Below are a handful of companies that sport:
- Betas below 0.75, suggesting that they're not too volatile.
- Three-year average annual growth rates of at least 10% over the past year, suggesting that they're meeting growing demand for their offerings in the market.
- Price-to-earnings (P/E) ratios below 25, suggesting that they they're not wildly overvalued right now.
|
Company |
Beta |
3-Year Avg. Revenue Growth |
P/E Ratio |
|---|---|---|---|
|
Altria (MO 0.40%) |
0.44 |
11.9% |
16.7 |
|
Arlington Asset Investment (AI +0.00%) |
0.73 |
35.5% |
1.4 |
|
Markel (MKL 0.91%) |
0.70 |
13.7% |
19.0 |
|
Nam Tai Electronics (NTE +1.40%) |
0.54 |
38% |
9.7 |
|
Two Harbors Investment (TWO +0.00%) |
0.53 |
444.9% |
10.4 |
Data: Motley Fool CAPS.
Digging into details
Tobacco giant Altria draws a lot of interest for its dividend yield, recently 5.1%. It's also a compelling business: Its customers are literally addicted to its offerings and it has been one of the best long-term performers ever in the U.S. stock market. Still, its future may not be quite as impressive as its past due to a shrinking base of smokers in the U.S. and increased regulations and taxes. Bulls like its fat profit margins, strong brand value (think Marlboro), and expansion into wine, while bears worry about debt, slowing growth, and the fact that it doesn't seem to be a screaming bargain right now.
Arlington Asset Management, meanwhile, has an even heftier dividend yield, recently 13.5%. It's an investment company specializing in mortgage-backed securities. It used to be known as Friedman, Billings, Ramsey Group, or FBR. The stock got a boost last year when the SEC concluded investigations into some of its 2007 activities without calling for any enforcement actions.
Specialty insurer Markel, sometimes referred to as a mini-Berkshire Hathaway due to its insurance focus and very impressive track record, recently reported a strong fourth quarter. It recently agreed to buy competitor Alterra Capital Holdings, which discouraged some due to concerns about dilution and the company's acquisition history, though others like the idea of Markel chief investment officer Tom Gayner having more funds to invest.
With a market cap around $640 million, China-based Nam Tai Electronics has soared some 150% over the past year, in part due to providing manufacturing services for tablets such as the iPad mini. In its stellar fourth quarter, the under-the-radar company reported sales up 263% over year-ago levels and noted that it's boosting its profit margins by shedding less profitable operations.
Two Harbors Investment is a hybrid mortgage REIT (real estate investment trust) that recently yielded an eye-popping 17.6%%. It focuses on residential mortgage-backed securities and has begun renting out some of its delinquent properties. It spun off Silver Bay Realty Trust last year. The company cut its quarterly dividend from $0.40 to $0.36 last year and then hiked it up to $0.55 as the year ended. Interested investors should read up on special considerations related to mortgage REITs.
Don't dismiss low-beta stocks as they may reward you well over time. You might even consider ignoring a stock's beta entirely, as there are plenty of more informative numbers to examine, such as simply revenue growth and profit margins.
