Many investors spend a good chunk of their day asking or answering one question; Is the market going up or down? And if you ask 2 people you will probably get 3 answers.
While this practice is as old as investing itself, I often wonder why we bother. If you guess right you win, if not you lose. And I said guess intentionally, because no matter your methods or experience, all we can really do is flip a coin.
We do this over and over and usually end up even at best. But what if there was a way to cut that out? Well there is and it lies within a stocks beta.
A Quick Lesson on Beta
While stocks with betas near zero, by definition, miss out on some upside when the markets rise, but they avoid the dramatic dips that hit most others. Beta is calculated by comparing percentage changes in a company’s stock compared to the percentage changes in the market for a given period of time.
For example, a stock with a beta of 0.5 has experienced swings half as much as the market, on average. If the market climbs 10%, the stock only gained 5%, but it works coming down as well. When the market dropped 10%, shares only lost 5%.
Market Neutral
I am not a fan of timing the market, but I will go as far as trying to mitigate its impact for risk management. Right now we seem to be at a great point for neutralizing that particular risk.
Half of the articles I have read over the past month have said we are headed for a double-dip recession and half said the correction is over and we are going up from here.
Why guess? Why not buy good stocks, with a low beta and ignore all of that noise. Here are 3 stocks with a minimal beta over the past 5 years and a Zacks Rank of #3 or better.
Family Dollar (FDO) has a beta of 0.1 and a forward P/E around 15 times. The company has a very stable earnings history, meeting or exceeding expectations in each quarter for the past 5 years. Most recently, Family Dollar reported earnings per share of 81 cents, a 35% jump from the previous year. At the time analysts were expecting 78 cents, marking the fourth consecutive earnings surprise.
Thanks to the strong quarter, management was confident enough to project a 20-25% increase in EPS, between $2.48 and $2.58. Family Dollar has seen strong sales momentum that bodes well for the remainder of the year.
On June 3rd Family Dollar reported a 7% increase in same store sales for the third quarter, which means the company could be in line for another good earnings estimate.
FDO had a minor hiccup coming off of the earnings news, as investors “sold on the news” but shares are rebounding. The MACD is on the verge of a buy signal, making this a good time to get into the stock.
ManTech International Corp. (MANT) provides a variety of information technology and other services to United States government agencies that focus primarily on national security.
The Zacks Consensus Estimate for both this year and the next are rebounding after 3 upward revisions for each in the past month. Analyst projections are averaging $3.44 for 2010, which is an 11% growth rate, and $3.87 for next year, which is a 13% increase.
Valuations are also looking good. The forward P/E coming in under 14 times and the PEG ratio of 0.9 says the growth rates are reasonably priced.
The chart for MANT is also looking like a good entry point. Shares have hit some resistance lately, but the over all trend should push that stock higher. Once that level is breach the breakout should produce a quick profit. Also, the industry provides stable business activity, making it a nice long-term hold as well.
Kraton Performance Polymers (KRA) produces engineered polymers with a variety of applications from roofing and automotive to medical and personal care.
This Zacks #1 Rank (Strong Buy) continues to see estimates revisions since its latest quarterly report in early May. The full-year Zacks Consensus Estimate for 2010 is up 72 cents, to $2.52, in the past 60 days. next year’s projections are averaging $2.69, up 66 cents. Compare these levels to the 81 cent loss in 2009.
Shares of KRA are trading with a beta of just 0.1. One share will only cost you about 8 times forward earnings and if you factor in the growth rate the PEG is a bargain at 0.4.
The stock is currently trading in a similar pattern as MANT but the resistance is coming at the 52-week high. Look for a trend of higher lows followed by a nice breakout.
Less Beta, More Sleep
The stock market has a very polarizing affect on people. Either you get excited over the opportunities presented in volatile environments or you will do anything you can to steer clear of them. Well if the latter sounds more like you, trimming your portfolio’s beta is a great way to put your mind at ease and help you catch more Z’s. Zacks Investment Research
