The magic words for the equity portion of any retirement portfolio are… cheap and safe. Buy on dips or weakness and buy into stable investments.
And safe or stable is usually measured by a stock’s beta. Beta is a measure of how much a stock’s price fluctuates or how smooth its price history is.
The assumption is, if the market plunges, low beta stocks will fall less, which, as retired investors, we all want. But that assumption is wrong on two levels.
Beta does not account for deteriorating fundamentals or a stock’s valuation or overvalued stocks.
Low beta does not mean low risk, especially in the current market. The introduction of low volatility funds in the past few years has resulted in much higher valuations and muted returns for so-called safe stocks.
Utilities and telecoms, traditional safe stock choices, posted very weak gains in 2013 while the broad market, in some cases, gained 30%. And, right now, low beta stocks trade at a 30% premium to high beta stocks.
Where those seeking a stable portfolio should be looking is in stocks with smooth earnings, low earnings betas, rather than smooth trading histories, low price betas.
A screen for smooth earnings histories and high beta stocks run by Barron’s kicked out three ideas: CSX (NYSE: CSX), Halliburton (NYSE: HAL) and E.I. du Pont de Nemours and Company (NYSE: DD). Earnings in 2013 for all three are expected to climb significantly despite challenges in their industries.
I have discussed the importance of exposure to the energy boom in the U.S. before in this segment, and Halliburton is one of my favorites.
CSX and DuPont are new but you should get to know both of them.
Be careful of the low beta trap. The focus should be on names with low earnings beta and long-term earnings stability. That’s how you don’t wake up broke in your 80s.