Dear Mr. Berko:
I am a very conservative investor with $19,000 to invest, but this market volatility makes me uncomfortable. So could you please explain the concept of beta to me and how it works? And could you recommend three to four high-quality issues with a low beta that won’t give me a heart attack when I open the financial section and see that the Dow has gone up or down 200 points? Thank you!
E.L., Springfield, Ill.
Dear E.L.:
Beta is the second letter of the Greek alphabet and has a value of 2. In fact, many years ago, when the Lord’s dog was just a puppy and I was a small lad, I had a cat called Beta because it was the second cat in a litter of nine. It was a Maine coon. I taught Beta to swim under water, fetch a pencil and meow on cue. He was literally and figuratively more fun than a barrel of monkeys.
However, in the stock-picking business, the “beta” of a stock is a number that describes the relationship of a stock’s price to the stock market. A beta of 0 tells us that the stock’s price has no relationship to the stock market. A positive beta tells us that the movement or change in the price of a stock follows the market, while a negative beta suggests that a stock inversely follows the market.
Here’s a simple explanation of the beta concept. A beta of 1 is neither more nor less volatile than the market. So if the market moves up 10 percent, a $20 stock with a beta of 1 is likely to move up 10 percent to $22. And if the market drops by 10 percent, that $20 stock is likely to fall in price to $18. So a beta of 1.5 suggests that if the market moves up or down 10 percent, a $20 stock with a 1.5 beta will probably rise by 15 percent to $23 or fall l5 percent to $l7.
Now, if a stock has a beta of less than 1, its price change will be less than that of the market. For instance, if the market rises 10 percent and a $20 stock has a beta of 0.50, that stock will rise to $21. Conversely if the market falls by 10 percent, a stock with a 0.50 beta will drop 1 point to $19. So a high beta above 1 suggests that a stock or a portfolio will perform more aggressively than the market, and a beta below 1 suggests that a stock or portfolio will be less volatile than the market.
Johnson & Johnson (JNJ-$62) has a beta of 0.60 so if the Dow rises 10 percent, JNJ’s stock price will likely rise by 6 percent; and if the averages fall 10 percent, JNJ’s stock price may fall by 6 percent.
And I think JNJ is a dandy issue to own in a very conservative portfolio for investors who seek low risks. The current dividend, which yields 3.75 percent, has been raised in each of the last 20 years. And this $62 billion health care company with a 21 percent net profit margin, the earnings of which have also increased in each of the last 20 years, is a favorite of many long-term growth and income investors.
PepsiCo (PEP-$64.92) yields 3.0 percent and also has a beta of 0.60. In addition to its beverage business, PEP is also Fritos, Doritos, Cheetos, Ruffles, Aunt Jemima, Rice-A-Roni, Tropicana, Quaker Foods and cereals. This $57 billion revenue company has an enviable record of revenue, earnings and dividend growth, as well as excellent prospects for future growth.
Kellogg (K-$49) yields 3.3 percent and has a beta of 0.55. K is the world’s largest cereal manufacturer. K is in the midst of a huge cost-reduction program that within three years should save the company more than $1 billion annually and add nearly 75 cents per share to earnings by 2014. This is a top-quality equity for investors who want to steer clear of current market volatility.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
© 2010 Creators Syndicate Inc.
