Wendy's (NYSE:WEN) is the kind of stock investors may wish to consider holding during a high risk or jittery stock market, a market that may sell off at the drop of a hat or if a European banker sneezes. Two factors that make this stock attractive are its low beta and potential longer term upside based on Wendy's turnaround story.
A stock's beta more or less gauges how the price of a particular stock moves in comparison to the overall market. A beta of 1 would imply the stock would move in sync with the market. A beta of less than one means it would most likely not move either up or down as high or as low as the market moves on any given day. By the same principal, stocks with high betas, or greater than one, tend to move comparatively higher or lower than the average stock in the market depending upon the direction the market is moving on any given day.
For example, Wendy's beta is .96, just less than 1. When the market sold off on Wednesday morning, Wendy's stock price moved down from the previous day's close of $5.04 per share to a morning low of $5.00 per share or a .8% move. This is what makes low beta stocks an attractive place to hide during down markets. McDonald's (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG) are other examples of low beta stocks. McDonald's barely moved to the downside, while Chipotle in fact moved up on Wednesday. Certain industries such as food and consumer staples tend to be low beta industries.
In contrast, high beta stocks in other industries such as Cobalt Energy (NYSE:CIE) which has a beta of 2.61 moved down nearly 4% during this morning's selloff. This does not mean that the whole energy sector is made up of high beta stocks. In fact, stocks such as Exxon Mobile (NYSE:XOM) that have a long track record of delivering fairly predictable earnings also garner low betas. Exxon Mobile has a beta of .57. Keep in mind that the beta of a stock is also a moving target, based on an average of the stocks movement in comparison with the overall market over a given time period. Thus, investors will notice the published betas of any given stock may change over time. For a more technical overview of stock betas, click here.
The second factor that makes Wendy's a compelling stock to own in a high risk market environment is the fact that it is in turnaround mode, which should deliver earnings to the bottom line in the years ahead. Wendy's recently announced that it will be pushing up prices of some menu items, while moving forward with store rehabilitations and management retraining. Given that Wendy's has managed to deliver solid earnings in the current down economy, it is likely that they will experience serious growth as the economy mends and consumers are more confident about spending money.
Disclosure: I am long WEN.