Posts Tagged 'low beta'

Dividend Investing

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401 Advisor, LLC specializes in building client portfolios using dividend paying stocks due to their long term history of providing superior returns over non dividend payers. I recently contributed to an article posted by U S News on their web site. The article highlights warning signs that a stock may be cutting their dividend in the future.


Investment Outlook – September 2012

Our portfolios have lagged the overall market since mid-June when the recent market rally started. The portfolios have continued to hold our “low beta” selection of dividend paying stocks and ETF’s.

The rationale to remain in “coast” mode is that it is my opinion the rally has been primarily fueled by Mario Draghi’s comment that the ECB stood ready to take “any action necessary” to preserve the Euro and by extension the EU, including Greece. The problem is that the ECB does not have the authority to follow through on such statements. Simply put, the ECB is prohibited from “printing” the money they would need to implement a U.S. style round of quantitative easing (QE). It is pretty well accepted, that absent such action, there is just not enough economic backing to backstop the financial bleeding in Europe.

The bull argument continues with the “bad news is good news” theme. With China’s economy softening, U. S. economic data “softening” at best, the economic stage is being set for a global simultaneous easing from China, the U.S. and Europe.

The best bull argument is that things are getting worse, so there has to be Fed intervention which would fuel a global rally. I am not willing to buy into that scenario. However, if we actually see such action come to fruition, we will change the look of our portfolio, jump on the bandwagon, and look for higher beta (more aggressive holdings) to capture gains if the rally truly emerges. With the risk to the markets extremely high if such hopes don’t materialize, I will wait for the Central Banks to literally “show me the money” before making a commitment with client’s hard earned investment dollars.

Below is a screen shot from comparing my Dividend and Income Plus Portfolio (Dark Blue line labeled “Manager”)to the S&P 500 for the prior 90 days. While the underperformance is clear, so should be our lack of volatility. In fact the portfolio sports a beta of .63, or a volatility measure of 37% less than the S&P 500. And even with our 20% cash position, the portfolio is sporting a very healthy 4.5% dividend yield.


Combining the low volatility with the dividend yield, we are extremely happy with our overall performance, especially for the risk adverse income investor, such as a current or near retiree. Furthermore looking at the graph below, again from, I zoom in our recent performance.

Since the recent market peak on August 17, the portfolio has outperformed the market by .7% over just two weeks.

Our ETF Seasonal Growth Model has had similar relative results.

Mario Draghi has “leaked” his plan for ECB bond buying and the reaction has been a big yawn. I expect September to be a volatile month and expect to close the recent gap in relative performance with the S&P 500. Primarily by maintaining value while the S&P 500 corrects.  I hope to be true to our motto, “It is not what you make, but what you keep that matters”.

Looking a little further out I do expect the post election rally. I have picked more aggressive investments to rotate into our portfolios if the rally does materialize. Until then patience is prudent.

Individual performances will vary depending on timing of investments, withdraws, specific holdings and allocations. Past performance does not indicate future results. All investing involves risk. Please consult with your financial advisor on suitability of any investments specifically mentioned prior to investing.

Is There Value Left in Low-Beta Market Sectors?

Today’s post appeared at and is reprinted below for my blog readers and clients, Aug. 9, 2012:

Low-beta stocks have been a good alternative for clients who want safety without going to cash. But value plays in this sector are getting hard to find—even utilities are getting overvalued. Is it time to move to higher beta investments? Here’s what to watch.

Since April we’ve been following our revised “Sell in May” seasonal discipline. Most advisors are probably aware of the Wall Street adage “Go away in May; don’t come back until November.” I adapt the “sell” part to “rotate to low-beta holdings.” While the strategy has worked out well so far this year, there are still nearly three months left in the seasonally soft period before the “buy” signal hits in late October or early November.

At that time I will start looking to rotate into higher-beta holdings. But that leaves the question of what to do with new investors. Is this the time to be committing more money to the same low-beta holdings? The answer provides an interesting look at the markets.

Despite what appears to me as horrid fundamentals, the market, as shown in Figure 1 using SPY, the S&P 500 tracking ETF, is definitely in a technically solid bull trend, and looks like it could challenge the year’s highs set in March.

Figure 1: SPY One Year


Despite what seems like endless whipsaws from Europe’s news de jour, volatility has actually diminished substantially since the third and fourth quarters of 2011. This can be seen in Figure 1 of SPY as well as in Figure 2 of the VIX.

Figure 2: VIX One Year


In Figure 3, I have graphed the S&P Low Volatility Index (green line) vs. the S&P High Beta Index (blue line) for the past year. While the low-volatility index is the clear winner for the past year, its relative gains have come from the “sell” seasons, to the left and right of the two vertical lines.

Figure 3: SPLV vs. SPHB One Year


This brings me back to my specific question “After a run of low-beta vs. high-beta stocks, is there still value to be found in low-beta holdings?” In general, considering the market and macro view as having turned somewhat negative, low-beta holdings can be a source of security in turbulent times. However, if they have become too pricey, could it be a better strategy to literally “go away” into cash? Or, if you see this as a market/economic bottom, is it time to look at higher-beta offerings?

It boils down to P/E

My basic definition of “value” lies in the P/E ratio. Ideally I want to be buying holdings with a P/E somewhat lower than the market. I see this as both offering a bit of a cushion to the downside and as offering greater upside if the P/E rises to a market multiple from “P” expansion relative to the “E.”

In Table 1, below, I have created a chart of the top sector holdings for both SPLV and SPHB. Then I looked at the current P/E ration for each sector, using the SPDR sector ETF or the Vanguard ETF for the Information Technology sector.

Table 1: Select Sector P/E Ratios

Source: Bill DeShurko,,

From the table above, we see SPLV is trading at a P/E premium to SPY of 17%, while SPHB is trading at a discount of over 11%. Unfortunately, there is not enough history to the indexes to look at historic relationships, so we’re left to guess at what levels mark over- and undervalued. However, I do think it is a safe conclusion to say that SPLV is getting pricey, and therefore may not be the low-beta play that one might be expecting should we have a market decline.

Delving deeper into the data, in Table 2, I ran a simple screen on utility stocks (the criteria are listed in the footnote on Table 2). Suffice it to say these are pretty simple criteria and rather low hurdles to expect a stock—especially a utility company stock—to clear.

Table 2: Utility Stock Value Screen


Using the same screener, only screening for U.S. stocks and the utility sector produces a list of 97 potential candidates. Finding only four that meet this screen tells me that utilities are getting overvalued. The last time utilities approached P/Es this high was the end of 2011. As seen in Figure 4, utilities flattened out for the first five months of 2012, the area between the vertical bars, as the “E” caught up with the “P.”

Figure 4: XLU One Year



The market has gone into a “risk on, risk off” mode for the last couple of years. You can see the cycle by comparing Standard & Poor’s Low Beta and High Volatility indexes. Clearly, on a one-year basis (as seen in Figure 3), the low-volatility index is the clear winner. The question is, can low-volatility sectors, and stocks still outperform, or do they need to correct to bring valuations down?

The answer to where to invest lies in your macro view of the market. As long as uncertainty persists, (fiscal cliff, election, Europe, slowing global economies), there will always be demand for lower risk investments. And in a near-zero interest rate environment, low beta stocks have offered an investment option. But after a solid run, relative to higher risk (higher beta) stocks, are lower risk holdings setting up for a normal mean reversion correction?

Conversely, if your confidence is high that we somehow muddle through our current list of problems, valuations are getting very compelling, as historical “growth” sectors are becoming value plays.

In digging deeper into the index holdings, there do appear to be a few value plays left. Personally, I’ll try to continue to find the individual stocks that meet my criteria in the low-beta sectors. But I’ll be watching my screens carefully for SPHB to gain solid momentum over SPLV. Historically the market is positive after presidential elections, and SPHB being both a bullish play and an undervalued bullish play could add some pop to client portfolios for the year.

Pre Mid-Year Wrap Up

As we head into the July Fourth Holiday I’m struck by what an appropriate holiday to be celebrating based on our financial markets. No, not so much the Patriotic implications, but the fireworks!! Every day when I come to work and power up the computer I’m expecting to see new “fireworks” exploding on my screen as some new catastrophe of the day has lopped a couple hundred points off the DOW.

Instead, surprisingly to me, the markets have really fared fairly well this year with SPY, the S&P 500 tracking ETF up just over 5% for the year.

Unfortunately 5% can be wiped away in just a couple days if fireworks are really ignited. Not surprisingly, I’ve received several phone calls from investors asking what our outlook and strategy are as we head into the second half of the year.

Since today is the 3rd, and a shortened trading day, and I plan on going out of town for the rest of the week, this will not be THE 2nd half of 2012 Outlook piece. But I thought I’d send out a brief note before what will be a very long weekend for some of us.

Bottom line the economic news that hit over the weekend was pretty bad. Virtually every single country showed flat or slowing growth in manufacturing as indicated by the PMI numbers that came out over the weekend. And yet the market has held up. The one Wall St. axiom I quote often is, “Don’t fight the Fed.” Meaning when the Federal Reserve is easing, or trying to stimulate the economy, the stock market will generally react favorably. Today, it is not just the U S Fed that looks to be moving closer to a new round stimulus. With the generally weak global PMI numbers China is loosening their lending requirements, Brazil looks to be reversing their currency policy and strengthening the Real before the World Cup and Olympic events that they will be hosting, and of course the big one, Germany has blinked first, and looks like they will accept a more accommodative policy for the rest of the Euro Zone.

Our strategy has changed a bit. I have sold SH, an ETF that acts in the reverse of the S&P 500, from our income portfolios. This 20% position did very well dampening our volatility for May and June, but I think July may be a decent month as Central Banks look to speed up the printing presses. Until next week, I’ll leave this in cash or a neutral position and see what happens when Wall St. returns from the Holiday. This does leave our targeted income a little short, so I will be making a move soon. Our ETF Seasonal Growth strategies are unchanged. Our low Beta (volatility) strategy has done very well since our “go away in May” sell signal tripped early in mid April this year.

For those of you that trade on your own, UNG the ETF that tracks natural gas has been moving up, and is right at resistance at $19.50. If it holds above this level it could be a buy. For really aggressive investors, Brazil might be a play heading into the winter Olympics. Neither holding would be appropriate for our strategies.

Of course past performance is no guarantee of future results. And any ideas suggested in this post require significant additional research before implementing into any portfolio.

Low Beta and High Beta

This is an article written by Mike Tarsala at that features my strategy and explains the use of “low beta and high beta” stocks. • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.