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Number Cruncher

In Buffett’s footsteps: The search for low volatility stocks Add to ...

Mr. Bowman is a portfolio manager at Wickham Investment Counsel Inc. michael@wickhaminvestments.com

What are we looking for?

My colleague Rob Belanger and I thought it would be interesting to take a look at low beta, or lower volatility, North American companies.

A new report from researchers at New York University and AQR Capital Management identified two main reasons for the success of Warren Buffett’s Berkshire Hathaway: leverage – and the fact the portfolio contains only low beta stocks.

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The screen

We ranked those companies based on a beta of less than one, meaning these corporations are less volatile than the market as a whole. Only companies with price-earnings ratios of less than 17 are included, and free cash flow is larger than $300-million. They all have a minimum of $1-billion market cap, and the return on equity is greater than 15 per cent. The dividend yield is more than 1 per cent, and the price to book ratio is less than 3.5. We are looking for a high number for return on equity and free cash flow, and a low price/book ratio.

What we found

The screen identified only 32 companies in all of North America, and we are showing the top 20. Canada’s BCE and Telus topped the list, and Bank of Montreal scored the best of all of Canada’s banks. Cheerios maker General Mills was No. 3 and Spam manufacturer Hormel Foods also made the cut. The top oil company, Exxon Mobil, came in at number 27, just ahead of Royal Bank of Canada and Coca-Cola. Companies that you thought would be very volatile, aren’t, such as Canadian National Railway and Amgen.

Admittedly, in the case of Berkshire Hathaway, returns would have been unspectacular without borrowed money. According to the recent study, Berkshire leveraged its capital by 60 per cent, on average, significantly boosting portfolio returns.

While most of us will not borrow money to invest, it is worth remembering that while investors expect more reward from high beta stocks, over the long haul the opposite is true: Low beta stocks outperform their high beta counterparts.

 

 

 

Low beta stocks

Company Ticker Beta P/E
BCE Inc. BCE-T 0.45 12.9
Telus Corp. T-T 0.46 16.6
General Mills Inc. GIS-N 0.58 15.1
IGM Financial IGM-T 0.59 12.5
Plains All Amer. Pipeline PAA-N 0.59 15.4
Target Corp. TGT-N 0.66 13.8
Shaw Communications SJR.B-T 0.67 12.1
Bristol-Myers Squibb BMY-N 0.69 15.5
Hormel Foods Corp. HRL-N 0.75 16.1
Humana Inc. HUM-N 0.77 8.7

Source: Wickham Investment Counsel Inc., Bloomberg

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  • BCE-T
  • T-T
  • GIS-N
  • IGM-T
  • PAA-N
  • TGT-N
  • SJR.B-T
  • BMY-N
  • HRL-N
  • HUM-N
  • CNR-T
  • BMO-T
  • BAH-N
  • DGX-N
  • UNH-N
  • AMGN-Q
  • CIM-N
  • SWY-N
  • CAH-N
  • BNS-T
Live Discussion of BCE on StockTwits
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Live Discussion of IGM on StockTwits
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Live Discussion of PAA on StockTwits
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Live Discussion of TGT on StockTwits
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Live Discussion of SJR.B on StockTwits
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Live Discussion of BMY on StockTwits
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Live Discussion of HRL on StockTwits
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Live Discussion of HUM on StockTwits
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Live Discussion of CNR on StockTwits
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Live Discussion of BMO on StockTwits
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