- On October 11, 2007 the S&P 500 hit a record high of 1,576 by
the time March 9, 2009 came along the S&P 500 slid all the way to
666. That represents a decline of 57.74%. The stock market crash was
caused by many different variables but the main factor was the financial
crisis. As the S&P 500 approaches its record level again investors
need to begin protecting their returns. Although a financial crisis of
the same altitude is unlikely to occur in the near future due to the
increased regulation and risk aversion from the same financial
corporations. One should still consider positioning their portfolio in a
defensive manner to hedge against likely sell-offs.
For the full year of 2008 the S&P 500 was down 37.00%. The best performing sector was consumer staples which only declined 14.97%, the worst performing sector was Financials down 55.19%. The S&P 500's current sector weighting in consumer staples is 10.70%. If one's portfolio has less weighting in this sector they either have a very bullish outlook for equities or are taking too much risk. For this article I am going to highlight three stocks in the Consumer Staples sector, that are included in the S&P 500 index, and have the lowest beta.
Beta is a good way to measure how a stock's performance has been affected by the market's performance or how it correlates to its benchmark index which is usually the S&P 500. For example if a stock has a beta of 1.0 it would suggest that if the stock market went up 10% the stock would also go up 10%. if a beta was 2.0 it would go up 20%. If the market went down 10% the beta of 2.0 would have went down 20%. If the beta is 0.5 the stock would have went down 5%. Beta does not reflect what a stock will do, it shows us what it has done in the past. With that said, beta should not be the only factor used to determine whether a stock is a good investment and doesn't always give clear predictions of volatility.
General Mills (NYSE: GIS) has the lowest beta of all stocks in the S&P 500 within the consumer staples sector at 0.17. It is a very popular brand in the U.S. that is also growing internationally. It is likely that General Mills has one or more products in nearly every household in the U.S. Its close on October 11, 2007 was 28.94 and when the S&P 500 hit its low on March 9, 2009 General Mills closed at 24.84 a decline of 14.17% compared to the -58% of the S&P 500
For the full year of 2008 General Mills posted a 9.47% return when the S&P 500 was down 37%. It also paid investors a consistent dividend with a yield of 2.72% at the end of 2008. Its current dividend yield is around 2.8% and its 10-year return is 9.78% compared to the S&P 500 at 1.14%. Although General Mills probably will not outperform the S&P 500 in a bull market it will certainly help investors sleep better at night in a volatile market.
Hershey Foods (NYSE: HSY) comes in a close second with the lowest beta in the consumer staples sector at 0.24. I once had a college professor tell his class he owned Hershey Stock so he could get free chocolate at its annual share holders' meeting. I also had a prospective client tell me she always wanted to own Hershey stock because of how much she loved their chocolate growing up. It was the only equity holding in her portfolio. People love chocolate and will continue to buy it even if finances are tight.
On October 11, 2008 Hersey's stock closed at 45.00 and on March 9, 2009 it closed at 30.90 this represents at 31% decline in stock price. Although the stock price decreased significantly through that time period for the full year 2008 its total return was -8.81% far better than the -37% of the S&P 500. Its dividend yield to investors at the end of 2008 was 3.43% and it has a long history of consistent dividend increases. Hershey's 10-year return is 11.85% and its current dividend yield is right around 2%
Campbell Soup (NYSE: CPB) comes in third with a beta of 0.30 in the consumer staples sector. It is also a very recognizable brand in the U.S. and internationally. On October 11, 2007 Campbell Soup closed at 36.25 and on March 9, 2009 it closed at 25.65 a decline of 29% which is the worst of the three stocks.
Even with the poor stock performance the total return for 2008 was -13.38 which is still better than the entire consumer staples sector at -14.97 and the S&P 500 -37%. Its 10-year return is 9.48% and its current dividend yield is 2.78%. Campbell Soup has also had consistent dividend increases rewarding shareholders for long-term holdings.
Stock summary S&P 500 General Mills Hershey Foods Campbell Soup Beta 0.17 0.24 0.30 Dividend yield 2.0% 2.8% 2.0% 2.8% 10-year return 1.14% 9.78% 11.85% 9..48%
With a current weighting of 10.7% in consumer staples if the S&P 500 is one's benchmark and they are concerned about the recent record highs in the market they should either be at market weight or overweight in this sector. Either three of these stocks are a good option to increase their weighting and reduce their overall portfolio risk and volatility without increasing holdings in fixed income or cash. This will also help if the market continues to give favorable returns one can still participate in the gains. This is something that over pessimistic investors have missed for the past few years.
The strategy is simple, one should pick a percentage increase like 10% and when their benchmark increases by this amount increase the weighting in defensive stocks like consumer staples. They would have the opposite approach to market declines increasing their weightings in more profitable investments so they do not miss the recovery.
In 2009 the consumer staples sector only had a return of 14.22% while the best performing sector technology had a return of 50.94% and the S&P 500's total return was 26.46%. If an investor would have had a higher weighting in consumer staples when the market hit its high in 2007 their portfolio would have had smaller losses. If that same investor would have decreased their holdings in this sector as the market declined they then would have been able to ride the market back up in more favorable sectors. At our current market levels it is critical to have some holdings in defensive stocks like General Mills, Hershey or Campbell Soup. Although they might not be as appealing as an Apple or Google it will help lower one's volatility and allow one to have some money to move around and buy other more appealing stocks after market crashes.
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