Hello again, Fools. I’m back to highlight a few stocks that display low volatility relative to the overall market (i.e., low-beta plays). As a refresher, I do this for conservative investors because low-beta stocks
- typically represent ownership in highly stable businesses;
- are a great way to shield your portfolio from big market dips (like the ones we’ve been seeing of late); and
- actually tend to outperform high-beta stocks over the long run.
Contrary to popular financial belief, stocks with low volatility actually offer a better risk/reward trade-off than high-volatility stocks due to the “low-beta anomaly.”
So, without further ado, let’s get to this week’s list.
Kicking things off is CGI Group (TSX:GIB.A)(NYSE:GIB), whose shares sport a beta of 0.6 — or about 40% less volatility than the overall market. The IT services giant is up 17% year to date versus a gain of 11% for the S&P/TSX Capped Information Technology Index.
CGI might operate in the ever-changing tech space, but the recurring nature of its business model provides plenty of cash flow stability. In Q2, revenue clocked in at $2.9 billion as operating cash flow increased 9% to $317.3 million. Management also posted bookings of $3.5 billion, along with a whopping backlog of $22.4 billion.
Over the past five years, CGI has grown its operating cash flow 175%.
When you couple that fundamental strength with the stock’s price smoothness, CGI is certainly worth checking out.
Next up, we have Loblaw Companies (TSX:L), whose shares have a three-year beta of 0.7, or about 30% less volatility than the overall market. Year to date, the food and pharmacy company is down 4% versus a loss of 6% for the S&P/TSX Capped Consumer Staples Index.
Loblaw is perfect play on the fact that people will always need food and medicine. Over the past 12 months, the company has generated $46.5 billion in revenue, along with $1.7 billion in free cash flow. More importantly, management has used its cash to repurchase shares — 4.6 million in Q3 alone — and dole out growing dividends to shareholders.
With a forward P/E in the low teens and decent yield of 1.9%, Loblaw looks like reasonably priced way to add portfolio safety.
Rounding out our portfolio protectors this week is Extendicare (TSX:EXE), which currently boasts a beta of just 0.3 — or about 70% less volatility than the market. Year to date, the senior home operator is down 17%, making it an opportune time to get in on the action.
Despite Bay Street’s bearishness, Extendicare continues to benefit from the ever-growing demand for retirement living. Over the first six months of 2018, operating income is up 5% on margins of 11.9%. Moreover, the company’s available funds from operations (AFFO) — a key metric in the real estate business — is up $4.7 million at $31.8 million.
Right now, the stock yields an attractive 6.5%, which seems pretty safe considering that the payout still represents a comforting 67% of AFFO. In other words, I wouldn’t wait too long to lock it in.
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Brian Pacampara owns no position in any of the companies mentioned. CGI Group and Extendicare are recommendations of Stock Advisor Canada.