6 Undervalued Stocks With Low Beta
Berkshire Hathaway and Verizon are among the low-volatility stocks that trade at a discount.
Investors have switched to defensive mode as economic uncertainty continues to upend financial markets. For some, the traditional inclination to flock to defensive sectors has yet to pay off. With the exception of utilities and energy, all sectors are down nearly 10% or more for the year as volatility looks set to continue.
Fortunately, there is another way to try and come out ahead than just by picking stocks in a certain sector: screening for low-beta stocks that are also undervalued.
Beta is a measure of a stock's volatility relative to the market. Stocks that tend to stay put while the broader market seesaws would have low beta, while those that move more drastically than the market would have high beta.
Couple a low-beta score with whether a stock is viewed as undervalued provides another way to screen for a potential investment. The low-beta score suggests the stock will be less volatile than the market, and the undervalued aspect means that Morningstar's analysts think there's room for it to grow in value in the long term. (To learn more about beta see our recent story, Never Mind Growth vs. Value Stocks, Look to Beta.)
To highlight stocks that met that criteria, we ran a screen for stocks with a three-year beta score of 0.8 or lower. To account for near-term volatility, we also screened for one-year beta scores of 0.8 or lower as well. We then filtered for stocks that had a Morningstar Rating of 5 stars. From that group, we then screened for stocks that had Morningstar Economic Moat Ratings of wide or narrow, which indicate competitive advantages over their peers.
Half these picks are healthcare companies, which is also a defensive sector. We also found opportunities in the financial- and communication-services sectors.
Here is what Morningstar analysts had to say about them:
"Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda (TAK) and CSL with the $3.7 billion acquisition of Talecris in 2011.
"Today, Grifols holds more than 20% of a roughly EUR 14 billion immunoglobulin market that is growing at a double-digit rate thanks to demand across multiple types of immune disorders. While immunoglobulin accounts for more than 40% of Grifols' top line, pulmonary product Prolastin leads the market for alpha-1 antitrypsin deficiency, and Grifols has seen solid albumin growth, owing to Chinese demand. With several products under the same roof, Grifols is able to improve margins, as more of the proteins in plasma are turned into marketed products."
—Karen Andersen, sector strategist
"HSBC's strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank's pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies and leveraging the bank's international network in bringing in new clients. According to HSBC, its banking network addresses 90% of global trade and generates about 40% of the bank's revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements."
—Michael Wu, senior equity analyst
"Following the spinoff of Baxalta in mid-2015, Baxter's new management team has focused on increasing efficiencies and innovating in medical products. That focus has resulted in much-improved profitability and cash flow generation since then. In the intermediate term, the company aims for mid-single-digit sales growth primarily through new product launches and for double-digit adjusted earnings per share and free cash flow growth compounded annually. Acquisitions, like the recent combination with Hillrom (medical equipment like hospital beds with digital connection capabilities), could add to those prospects."
—Julie Utterback, senior equity analyst
"Verizon is primarily focused on the wireless business, where the firm has taken steps to ensure it remains well positioned in the traditional wireless business, building fiber deeper into major metro areas, acquiring a huge chunk of spectrum in 2021, and ramping up spending to put that spectrum to use. We believe Verizon will deliver consistent results over the long term, but growth will likely be modest. Rivals AT&T (T) and T-Mobile (TMUS) offer comparable services and sell at similar prices, which we expect will diminish Verizon's market share lead over time."
—Michael Hodel, director
"We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic arm.
—Karen Andersen, sector strategist
"We continue to believe that Berkshire, owing to its diversification and its lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector (and remains a generally solid candidate for downside protection during market selloffs). We continue to be impressed by Berkshire's ability in most years to generate high-single- to double-digit growth in book value per share, comfortably above our estimate of its cost of capital. We also believe that it will take some time before the firm finally succumbs to the impediments created by the sheer size and scale of its operations, and that the ultimate departure of Warren Buffett and Charles Munger will have less of an impact on future operating results than many investors believe. We view Berkshire's decentralized business model, broad business diversification, high cash-generation capabilities, and unmatched balance sheet strength as true differentiators for the firm."
—Greggory Warren, sector strategist
Jakir Hossain does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.