2 low-beta stocks for investors who hate stock market volatility
With US election uncertainty rattling the markets, now may be the time to allocate part of your portfolio to low-beta stocks. Low-beta stocks exhibit lower correlation with the stock market index, so they tend to fare better during downturns.
The problem is that many low-beta stocks are looking pricey these days, especially after the recent rush for relatively safe assets ahead of the US election. Nevertheless, I think I've found two such stocks that seem to offer reasonable value.
Attractive free cash flow
With a beta of 0.35, shares in cruise company Carnival(LSE: CCL) should be able to weather the potential rise in market volatility over the next few months. The company has expected earnings growth of 26% for the current year, and the shares currently trade at 14.4 times its expected 2016 earnings. That's lower than the sector average forward P/E of 16.8, and substantially cheaper than its five-year historical average of 20.6.
Despite concerns over the spread of the Zika virus and recent terrorist attacks in Europe, forward bookings for this year and next are ahead of last year's levels and have exceeded earlier expectations. Margins are also improving because of lower fuel costs and growth in onboard spending, which should help the company's bottom line to grow faster than its revenues.
With cash flow from operations expected to rise to around $5bn this year and capital spending set to taper off over the next few years, Carnival has excellent free cash flow prospects. The company has already committed to buying back $1bn worth of its own shares, but I expect the company to return even more cash to shareholders in the next few years, given its strong balance sheet and robust cash generation.
The stock has a trailing dividend yield of 2.3%, and City analysts expect its prospective yield to be 2.7% in the coming year.
Thriving on volatility
It may seem odd that an investor who hates volatility would buy shares in a company that thrives when the markets move sharply. But it's exactly because the company tends to do well during periods of volatility that makes its shares a good hedge against an increase in volatility.
This explains why spread betting and CFD company IG Group (LSE: IGG) has a beta of just 0.49. And it's because retail traders tend to trade more actively during periods of higher volatility, particularly around high profile news events, that the company generates more revenues and profits when market volatility is higher.
City analysts are pretty optimistic about the financials of the company. Adjusted earnings are forecast to grow 5% this year, with a further 14% increase pencilled-in for 2017/18. This implies shares in IG trade at 17.5 times its expected earnings this year and 15.3 times its earnings for 2017/18.
The stock is also tempting from an income standpoint. Given its strong capital position and limited capital spending requirements, IG intends to pay approximately 70% of annual earnings out as dividends. The shares currently yield 3.8% and analysts expect dividends to rise by 6% next year.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.