In 2011, the winning investors were the ones who invested in low beta stocks and avoided the high volatility that plagued the market for much of the year. This includes food manufacturers like Kraft Foods (KFT), consumer goods companies like Kimberly Clark (KMB), and discount stores like Dollar General (DG). Stocks like these in no way have the potential to double or triple in a calendar year, but with 2011 returns for these stocks ranging from 16.69% (Kimberly Clark) to 34.14% (Dollar General), these stocks are worth some consideration. Since their value is backed by current earnings and a strong case for future growth, they are by no means bubble stocks.
For the most part, the big gainers from last year will most likely flatten out in 2012. And if we end up having a bullish year like many are expecting, they will definitely underperform the market due to their low risk nature. However, there are plenty of buying opportunities out there for investors who missed the boat in 2011.
Currently, I am a big fan of General Mills (GIS). The stock experienced a 13.53% gain in 2011 and I believe that there is a lot more upside potential. With FY 2013 earnings (ending in May) expected to be $2.82, shares could potentially trade as high as $56 in the next year and a half. Realistically though, I believe that shares can eclipse $45 in one year, which would be a 15.12% gain based on its $39.09 closing price on February 10th. With a beta of 0.19, General Mills is essentially immune from a strong downturn in the stock market and could be an excellent beta hedge for portfolios with a lot of market exposure.
As bank stocks and other stocks that took a big hit in 2011 rebound and investors continue to buy them up, it is important to look at ways to hedge risk beyond options and shorting. In a bull market, investing in low beta stocks can help reduce overall market exposure while still holding an overall long position in the market. Since betas are heavily correlated by industry, having low beta stocks in a generally high risk portfolio also helps investors strongly diversify their portfolios.