7 Low Volatility Stocks to Buy to Escape Wild Market Swings
InvestorPlace - Stock Market News, Stock Advice & Trading TipsAs rate hikes and other uncertainties send the market on a roller-coaster ride, consider these seven low volatility stocks.The...
The market may be bouncing back after last month's sell-off, but expect wild moves to remain in the coming months. Driven by the U.S. Federal Reserve debating to what extent it will raise interest rates, alongside other uncertainties, low volatility stocks are looking quite appealing right now.
During 2020 and 2021, if you stuck to such low-risk names, you missed out on a lot of upside. It didn't pay to play it safe during the pandemic era with riskier, more speculative plays making outsized moves higher. There wasn't so much penalty in throwing caution to the wind. Instead, riding the near-zero interest rate, "growth at any price" wave resulted in big gains for those following the trend.
But now the situation has flipped. With rates moving back up, former high-fliers stand to head lower. Higher rates mean less frothy multiples, due to an increased discount rate. That's bad news for EV stocks, meme stocks, SPAC stocks, tech stocks, you name it. All of them could experience another round of double-digit percentage declines.
In contrast, low volatility stocks could be relative safe harbors if the market stays stormy throughout the year. Consider buying some or all of these seven:
- Campbell Soup Company (NYSE:CPB)
- Dollar General (NYSE:DG)
- Duke Energy (NYSE:DUK)
- Johnson & Johnson (NYSE:JNJ)
- Altria Group (NYSE:MO)
- Sprouts Farmers Market (NASDAQ:SFM)
- Verizon (NYSE:VZ)
Low Volatility Stocks: Campbell Soup Company (CPB)
With little in the form of revenue and/or earnings growth, processed food giant Campbell Soup has seen its share deliver middling returns over the past few years. Unlike some other packaged goods stocks, it didn't even get much of a boost during 2020, when the initial pandemic wave kicked off the "cook-at-home" trend.
On the flip side though, the subpar returns of CPB stock have kept it at a reasonable low valuation. At today's prices, it trades for just 15.8x earnings. This, plus the recession-resistant nature of its business, has kept it from experiencing a tumble in recent months.
In fact, since late November, when rate hike worries started to affect the market, Campbell Soup stock moved slightly higher. Going forward, this resiliency could continue. With its portfolio of popular food brands, it will be able to continue raising prices to keep up with inflation. This will keep earnings steady, mitigating downside risk.
It goes without saying you aren't going to get rich with CPB stock. In fact, you may see only a single digit return from holding it (largely due to its 3.3% dividend). Yet if there's another meltdown, a small positive return will surely beat a high negative one. Keep this on your watchlist if you're looking for less volatile plays.
Dollar General (DG)
At first glance, it may seem like buying shares in a dollar store chain isn't the best idea in an inflationary environment. After all, with consumer and producer prices rising, how can Dollar General continue to price things for only a buck?
First things first, don't let the name fool you. This discount retail chain does not limit prices to $1. Unlike Dollar Tree (NASDAQ:DLTR), which until recently was selling all in-store items for $1 (it's now charging $1.25), this retailer is more like Wal-Mart (NYSE:WMT) than a bona fide "dollar store."
Margin contraction can be a concern as prices rise. Morgan Stanley's Simeon Gutman noted this as a key reason behind his downgrade of DG stock. However, this could be countered by increased traffic from budget-conscious shoppers, and not just its historical low-income and rural customer base. Middle-class households have been gravitating to these types of store since the pandemic, and have continued to do so, as inflation cracks the high single-digits.
Trading for just 19.5x earnings, while it's down year-to-date, over the past year it has made less wild moves than the overall market. This is one of the best low volatility stocks out there.
Duke Energy (DUK)
As the market environment changes, and "safe and steady" becomes more appealing, it's a good time to stock up on utilities, which have long been low volatility stocks. With set rates, consistent cash flow, and fairly high dividends, these have historically been solid performers, especially during times where being risk-averse is the right move.
There are scores of utilities stocks to choose from, but one you may want to consider is Duke Energy. Providing electric and gas to customers in the South and Midwest, Duke is one of the larger names in this sector. Over the past five years, shares have trailed the market (as measured by the S&P 500 index) by a wide margin.
While the S&P more than doubled during this timeframe, DUK stock is only up 58% (including dividends) since February 2016. Yet while owning the index has been more profitable than owning this company over the past sixty months, when it comes to the upcoming 12 months, it may wind up being the better performer.
With its fairly low valuation (a price-earnings ratio of 18.2), DUK stock will see far less impact if the market tanks again. With a nearly 4% dividend yield to boot, keep an eye on Duke.
Low Volatility Stocks: Johnson & Johnson (JNJ)
Over the past year with its shares basically holding steady, JNJ stock has been far less volatile compared to benchmarks like the S&P 500. This will likely continue, as it's well positioned to remain resilient even if the stock market continues to be rocky.
First, it's a high-quality, blue chip company. Whether we're in prosperous or tight times, Johnson & Johnson will deliver solid operating results. Second, related to its blue-chip nature, this is one of the famed dividend aristocrats.
To gain this status, a company needs to raise its dividend at least 25 years in a row. In the case of JNJ stock? It's raised its dividend a staggering 59 years in a row. This has been a winner for income-focused investors who have made it a long-term holding.
Third, with its low valuation of 15.9x, there's less concern that rising interest rates will cause multiple compression for this blue chip. Compare that to some other aristocrats, with earnings multiples well north of 20x.
Yes, at a time where annual inflation is 7.5%, its 2.5% payout may not seem like high yield. Still, as the key in today's markets is to go on defense, cycling into this lower-risk, lower-volatility name may be a move worth making.
Altria Group (MO)
Since last February, shares in Altria Group, parent company of cigarette maker Philip Morris USA, bounced between the low-$40s and the low-$50s per share. Lately, shares have been moving to the upper end of this band.
Why? MO stock's high dividend. Paying a $3.60 per year in dividends, investors searching for higher yields as rates rise have jumped back in. Yet while it's made around a 17.5% move since December, it's not too late to make this "sin stock" one of the plays in your portfolio of low volatility stocks.
Priced at just 10.4x earnings, with earnings per share expected to grow next year (albeit by low single digits), MO stock is not likely to experience multiple compression like more richly priced consumer staples. With demand for its main business (tobacco products) highly inelastic, inflationary pressures will weigh on it less as well.
Atop this, is the fact that its long-term plan to move beyond smoking could lead to upside down the road. Put it all together, and this stock could hold steady during tough times. During the next economic upswing, it could then move higher. If you're looking for high-yield, and low volatility, consider MO stock a buy.
Sprouts Farmers Market (SFM)
Sprouts Farmers Market is yet another value play that's less volatile than the overall market. An operator of organic grocery stores, although its been trending higher in recent months, there's concern that inflation will be negative for the company. That is, a more price-conscious shopping public may opt for cheaper alternatives, and avoid the chain altogether.
The food retailer has already experienced an issue of reduced customer traffic. Its sales slid slightly in 2021. With this, it may seem odd I'm including SFM stock on this list. But while this may imply that its days of low volatility are behind, that may not be the case. Trading for 14.4x earnings, its drop in revenue/earnings during 2022 has been accounted for in its valuation.
In addition, its long-term strategy could make this slight dip in operating performance appear to be little more than a hiccup in hindsight. Targeting moderate revenue growth with its game plan, there may be enough in play to enable the stock to keep steady at present prices (around $30 per share).
Its small cap nature and lack of dividend may make it differ from the other low-volatility stocks discussed in this article. Even so, you may want to give it a closer look.
Low Volatility Stocks: Verizon (VZ)
Despite the buzz around the 5G rollout, with only satisfactory quarterly results, investors haven't been too excited about telecom play VZ stock. Basically flat over the past 12 months, it's more or less stayed around $55 per share.
That said, now may be the time to snap up Verizon shares. As the market changes, slow and steady names like this one have become more appealing. If the market takes another tumble due to rising interest rates? This cheaply priced (P/E of 9.8), high yield (4.8%) name could hold steady. The recession-resistant nature of its business will also minimize the impact of a possible economic slowdown.
Better yet, this year's 5G rollout could result in stronger quarterly numbers. With this, shares could have room to move back above $60 per share. That's a price level it hasn't reached since late 2020. As I've discussed recently, Verizon's main peer, AT&T (NYSE:T), looks interesting as well.
But if you're looking for a less complicated situation, you may want to go with this one instead. Remember that AT&T is in the midst of a divestiture and a dividend cut. While it may have less upside than T stock might if its restructuring works out, you'll see less volatility with VZ stock.
On the date of publication, Thomas Niel held a LONG position in MO stock. He did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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