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Last week was fairly volatile for the stock market, and with the recent bull market spanning over six years, this year could bring more peaks and troughs. Meaning, a volatile market could be the story for 2015.
The Federal Reserve appears to be getting closer to increasing interest rates. Up until now, the Fed’s monetary easing has encouraged a steadily rising stock market, where investors have found solace in owning risky assets.
But as the Fed tapers its easing and looks to push rates higher, investors will be forced to become more active when it comes to finding worthwhile stocks, leading to increased volatility.
Already year-to-date we’ve seen 15 days where the S&P 500 was up or down more than 1%. Compare that to 38 days for all of 2014 and 39 days for 2013.
While the bull market might not be over, the choppiness of the market should increase in 2015. That’s why today’s theme is all about finding low volatility stocks.
No. 1 Low Volatility Stock: Dollar General (NYSE: DG)
Dollar General is the $23 billion market cap dollar store operator. It’s the largest discount store in the country, in fact, operating nearly 12,000 stores across 40 states. One of the biggest reasons to like the stock is its 0.35 beta. Recall that beta is a measure of volatility. In theory, a beta of 0.5 means that for every $1 fall in the market, the stock should only fall 50 cents.
The beauty of Dollar General is that its low-priced products do well during times of economic turmoil. But it also has a strong base of low-income shoppers that frequent the stores regardless of the economic backdrop. Dollar General is focusing on growing its store base and adding more value-priced items to encourage more traffic, which includes offering more consumables.
The other angle to Dollar General is that it’s becoming shareholder friendly. While its 1.2% dividend yield might not look like much, its dividend is new and should only move higher. This is partly because of the company’s failed attempt to buy Family Dollar. As a result, it plans to focus on upping its dividend and following through with its $1.3 billion buyback plan.
No. 2 Low Volatility Stock: AutoZone (NYSE: AZO)
AutoZone is one of the leaders when it comes to selling auto parts. It’s a $22 billion market cap retailer with some 5,000 stores in the U.S., Mexico and Brazil. And like Dollar General, its beta is very low, at just 0.38.
AutoZone is a leader when it comes to sales per square foot in the auto parts retail industry. It is seeing benefits from the fact that the average age of cars on the road is near all-time highs (currently just over 11 years old). With that, last quarter marked the 33rd consecutive quarter of double-digit earnings growth for AutoZone.
Let us not forget the fact that AutoZone is a buyback machine. Over the last 10 years, the company has reduced its shares outstanding by 59%. And again, even in a down market, people will need to spend money for upkeep on their vehicles. The fact that people are driving more miles (partly due to low gas prices) is just another positive for AutoZone.
No. 3 Low Volatility Stock: Lions Gate Entertainment (NYSE: LGF)
The third name on our list is the smallest of the stocks, with a $4.75 billion market cap. It’s also the most underrated. Its dividend yield of just 0.8% isn’t much on the surface. But with a beta of just 0.5, I still like it as a low volatility play.
While the movie industry can be volatile, Lions Gate has a proven track record of creating high-demand films and TV shows, such as “The Hunger Games,” “Orange Is the New Black” and “Mad Men.” Last year, it released 13 motion pictures, and it plans to release another 13 or so this year.
Of note, Lions Gate also recently traded 10% of its company for shares that equal 14.5% of the voting power at Starz (NASDAQ: STRZA). As part of the deal, billionaire deal maker John Malone will join the Lions Gate board. This means that there could be partnerships on the horizon between the two.
Volatility can be a nightmare for investors, leading them to sell at the absolute wrong time. But for investors looking for a little more stability in their portfolios, low volatility stocks are worth a closer look.
I like the three names listed above because they have steady businesses that lend themselves to outperformance during the good and bad times.
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