You've lost your taste for risk with all the talk of CoreWeave's debt and an AI bubble about to pop. You crave safe, lower-risk stocks that would -- in theory -- hold up well in a market selloff.
Dissuade yourself of that notion. It could be a big mistake.
Some low-risk names, aka low-beta -- actually perform worse on big down days for the market than investors would expect, writes Trivariate Research's Adam Parker.
Beta is a measure of how much a stock moves compared with the S&P 500. Stocks with a beta below 1 fall less than the broader market when the index is declining and ones with a beta above 1 fall more. On up days, low-beta stocks gain less and high-beta stocks gain more.
Parker is "worried that many investors own low beta names that are not holding up when the market sells off."
Plus, most institutional investors like pension funds or mutual funds own less stock in the Magnificent Seven and Broadcom -- a group Parker calls the "Great 8" -- than they typically should.
If money starts flowing back into tech companies, those investors will miss out on the gains unless they quickly buy more of the Great 8. Missing out would make their fund performance look bad compared with the market.
"A concentrated market with more volatility is likely," he wrote, noting that the so-called gigacap Great 8 stocks "have a meaningful chance of outperforming."
That means investors need to be wary of the stocks that look relatively safe but actually have big drops on particularly rough days for the broader market.
That list includes defense giant RTX, Charles Schwab, railroad Union Pacific and its proposed merger partner Norfolk Southern, life sciences conglomerate $Danaher Corp(DHR-W)$., Starbucks, uniform company Cintas, and Intuit.
All eight stocks have betas well below 1. But their betas spiked on big down days, according to Parker and his researchers at Trivariate.
Starbucks, for example, has an average beta of 0.36 this year through the end of September. But its beta surged to 1.6 on days when the S&P 500 fell more than .75%.
In other words, Starbucks shares did 60% worse than the index on tough days for the broader market. Schwab was another stock that fared particularly worse than the S&P 500 in difficult stretches for the market. Its beta rose from 0.46 to 1.31.
"We want to be cautious of stocks that appear to be low beta, but aren't so on down days," Parker wrote.
Keep that in mind the next time the broader market takes a nasty tumble. The stocks that look safe on normal days may be anything but stable if the S&P 500 is getting hit in a broad-based selloff.
Parker also identified several stocks that have held up quite well during all the AI turmoil.
Telecoms Verizon and AT&T, known for their big dividends, metal packaging manufacturer Crown Holdings, insurance broker Aon, and Apple Inc. were all up at least nine times out of 10 on days where chip stocks fell more than 1% through mid-October.
So it turns out that there are places to hide when the market is choppy. It just may not be low-beta stocks.
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