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sale of pepsi products
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Investors have been buying low-volatility stocks to protect their portfolios against stock market crashes. These stable stocks are likely to continue to do well as long as uncertainty about the economy remains high.
They include actions like
PepsiCo (PEP), manufacturer of household and personal care products
Church and Dwight (CHD), McCormick Seasoning Manufacturer (MKC), Waste Management Service Provider
Republic Services (RSG) and aerospace and defense contractor
General Dynamics (GD). All of these stocks have betas of less than 1, which means that over the past year, their stocks have been less volatile than other stocks.
S&P 500 Index. A key factor that allows these stocks to be so stable is that their earnings are consistent regardless of the shape of the economy. These actions are all in the
Invesco S&P 500 Low Volatility Exchange-Traded Fund (SPLV), which selects approximately 100 stocks with the lowest beta in the broader index.
These stocks have already had a solid performance. The ETF is up 4.8% in the past six months, while the S&P 500 is up just 1% in that span. Shares of PepsiCo, Church & Dwight, McCormick, Republic Services and General Dynamics rose between 4% and 22% in the same period. Enabling superior performance has been a list of economic concerns. the The Federal Reserve is expected to raise interest rates many times within the next two years to avoid high inflation. That is likely to slow economic growth. The Russia-Ukraine war means there could be more restrictions on Russian commodity exports; that could cut off global supplies and raise prices, curbing consumer spending in the process. But low-volatility stocks can do well because their sales and earnings are less dependent on strong economic demand.
But it’s not that security trading is over: outperformance from here is still more than possible. The market is still trying to quantify the potential economic damage of all these problems. That’s especially true in light of rate hikes, “high oil, persistent price pressures, and [potential] downward revisions to GDP,” wrote Chris Senyek, chief investment strategist at Wolfe Research. “We continue to recommend staying in a defensive position.”
That, combined with the fact that many stable stocks haven’t even outperformed the market in leaps and bounds yet, means they still look attractive. Taking a step back, the low-volatility ETF has still underperformed the S&P 500 since 2016, though it has recently started to catch up. But it has more ground to recover before it can be considered “overbought,” Wells Fargo strategists wrote. The bank’s data shows that historically, the ETF enters overbought territory when it outperforms the S&P 500 by at least 20% over a long period of time. “Low Vol’s relative performance chart suggests there is more room for outperformance,” wrote Christopher Harvey, chief equity strategist at Wells Fargo.
This certainly does not exclude those five specific actions. They are among the 40 lowest “earnings turmoil” stocks in the S&P 500, according to 22VResearch. That’s just a way of saying that its earnings are the most stable of the other stocks in the index. They “should perform better during periods of tighter financial conditions. [Fed policy tightening],” wrote Dennis DeBusschere, founder of 22VResearch.
It’s not too late to buy this type of stock.
Email Jacob Sonenshine at jacob.sonenshine@barrons.com
