Buy These 3 Low-Beta, Blue-Chip Stocks To Limit Your Downside Risk

Includes: JNJ, LMT, WMT
by: Robert Riesen


With many stock valuations at all-time highs, it's time to start taking profits and reallocating to a more downside resistant portfolio. Let beta be your guide.

A vow from President Trump to increase defense spending will bolster Lockheed Martin's profitability for the next 4 years.

Healthcare costs are expected to continue outgrowing GDP - a catalyst for Johnson & Johnson's pharmaceutical, medical device, and consumer goods businesses.

Retail isn't dead. Wal-Mart is still a dominant force and expects its investments in e-commerce to transform the company in the future.

Current Market Dynamics

According to the Wall Street Journal, the S&P 500's P/E ratio is currently at 24.5. There's only been a handful of times over the last 100 years when valuations have been higher, which includes the 2008 financial crisis and the dot-com bubble of the early 2000s.

According to the Congressional Budget Office, real GDP is expected to grow at an annual rate of 2.1% from the 4th quarter of 2016 to the 4th quarter of 2018. To put this into context, the 1970s, 1980s, and 1990s all had higher growth rates.

U.S. Real GDP Growth Rates

1970s 1980s 1990s 2000s 2010-2015
Avg. GDP Growth 3.3% 3.16% 3.38% 1.69% 2.12%

Data Source: Bureau of Economic Analysis

This data doesn't necessarily mean a crash is coming, but one thing can be said for certain. Stocks are valued very high right now with what appears to be an upcoming period of average growth.

A Quick Lesson on Beta

Don't worry, beta can help.

Beta measures whether a stock is more or less volatile than the market. In general, a stock that has a beta less than 1 will be less volatile than the overall market. A stock with a beta greater than 1 will be more volatile. For example, a portfolio with a beta of 0.6 will outperform a portfolio with a beta of 1 in a downside market. In a bull market, that same portfolio would likely underperform.

Keep in mind that beta does not measure the risk of an investment held on a standalone basis, but rather the amount of risk an investment adds to an already diversified portfolio. The point is that none of these stocks should be invested in on a standalone basis. They should be added to a portfolio for their additional diversification benefits, and will help provide downside protection if the stock market underperforms.

Beta Stock Screening Criteria

  • Beta less than 0.75, but greater than 0 (based on the last 36 months). This implies a stock will move in the same direction as the market, but at a smaller rate.
  • A dividend yield greater than 2%. This criterion is simple. Investors like getting paid sooner rather than later. Dividend stocks also outperform growth stocks in down markets, providing additional downside protection.
  • Stocks in different market sectors. The stock picks presented below represent investments in the retail, defense, and healthcare sectors.
  • P/E ratio less than the S&P average of 24.5. For stocks that are attractively valued, less speculation is needed for near-term performance.
  • Well-known blue-chip stocks with strong brands that have consistently weathered recessions.

Lockheed Martin (NYSE:LMT) - (0.7 beta; 20.12 P/E; 2.76% dividend)

With sales of $47.2 billion in 2016, Lockheed Martin is the world's largest defense contractor. The majority of its business is from the U.S. government, which does pose long-term risk due to fluctuations in government spending. However, that should pose no issue to Lockheed for the next couple of years. According to President Trump, from his last press conference:

"I've ordered plans to begin for the massive rebuilding of the United States military. I've had great support from the Senate. I've had great support from Congress, generally."

The president's consistent vow to bolster America's defense spending should have a positive effect on Lockheed's top line over the next 4 years and increase profitability.

Johnson & Johnson (NYSE:JNJ) - (0.74 beta; 19.93 P/E; 2.73% dividend)

A large and diversified health care company, Johnson & Johnson's business is diversified across pharmaceuticals, medical devices, and consumer products. Its well-known consumer brands include Neutrogena, Benadryl, Listerine, Tylenol, Band-Aid, Imodium, Johnson's Baby and many others.

Healthcare spending will continue to outpace GDP growth. According to Centers for Medicare & Medicaid Services, healthcare spending is projected to grow at an average rate of 5.6% per year until 2025. This is 1.2% faster than projected GDP growth over the same period. Multiple recent acquisitions and a robust clinical pipeline make Johnson & Johnson well positioned to capture this increasing demand. According to a January 2017 press release, the company expect sales growth of 3.0% to 3.5% in 2017, resulting in earnings growth of 4.8-7.0%.

Wal-Mart (NYSE:WMT) - (0.6 beta; 14.93 P/E; 2.91% dividend)

Wal-Mart has experienced many negative headlines of late, like Warren Buffett dumping the stock. However, anyone who thinks "retail is dead" isn't paying attention to Wal-Mart's $482 billion top line, most of which comes from its retail stores. There are definitely major hurdles ahead as more and more consumers buy products online, but the company is responding to this issue by investing heavily in e-commerce (i.e., its acquisition).

Some of Wal-Mart's pundits argue that as the company's e-commerce business grows, it will just cannibalize its existing sales. While that's true to a certain extent, it's not true for a large percentage of the company's sales. Wal-Mart has a huge presence in the food industry, which will likely stay retail for the foreseeable future. People will continue to want to shop at physical retail outlets - it's just unclear what level that will be at. In the future, there will be a happy medium between e-commerce and retail. This is why Amazon (NASDAQ:AMZN) recently started investing in "pop-up" stores, since the company acknowledges there are some goods people like to see in person.

For now, there are enough positives that warrant an investment in Wal-Mart. For starters, it is still one of America's strongest brands and is attractively priced at a 14.93 P/E. Also, this is still a highly profitable company that produces ~$25 billion in cash flow per year. That capital will allow Wal-Mart to make any necessary investments going forward. It will simply be about execution.


Beta can be a very useful tool in managing risk and improving diversification of a portfolio. Portfolio managers routinely use beta as a key indicator for whether a portfolio needs to be rebalanced more aggressively or more safely.

These stock picks are recommended for their less volatile nature, especially given the unpredictability of a market that appears to be overvalued. Even if a market correction isn't on the horizon, these stocks still represent long-term investment opportunities. Each are valued reasonably, have superior brands, and have a long history of generating profits for their shareholders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.