By Peter Ashton
With U.S. stock indices now trading very near all-time highs, many market watchers are suggesting caution is warranted in light of the lofty valuations seen by some stocks.
The average price-earnings ratio of the Standard & Poor's 500 index is now around 25 compared with a long-term average of around 16. A strategy to seek out low volatility stocks in traditionally defensive sectors may be rewarded in the case of a correction or market downturn.
The Screener
We used Trading Central's Strategy Builder to search for large-cap U.S. stocks (market capitalization more than $10 billion) in the consumer staples, telecom services and utilities sectors. These three sectors are often thought of as defensive and should fare better than the overall market in the event of a market downturn.
To select companies that are reasonably valued, we screened for stocks with a forward P/E of 16 or less. Forward P/E uses analyst estimates for company earnings in the coming year. To further refine our list, we applied a second filter to look for price-book ratios of less than 4. Price-book is a traditional value investing criterion.
To select stocks with lower than average correlation to the overall market (and therefore less volatility), we filtered using beta. We selected stocks with beta of less than +0.75. Beta measures the price correlation of a security compared to the entire market. Stocks with beta in this range exhibit a smaller correlation to overall market moves.
Finally, we will selected stocks with dividend yields of 2 percent or more. Dividend-paying stocks have traditionally provided something of a safe haven in times of market turbulence due to their income-generating nature.
The result. AT&T (NYSE: T)is the largest company on our list with a market cap exceeding $206 billion. This telecom services giant is well valued with a forward P/E of just 11.7. AT&T stock has had a rough run in 2017, down more than 20 percent. In addition to a low P/E, the stock price decline has also led to a high dividend yield of 5.8 percent.
PPL Corp. (PPL), formerly known as Pennsylvania Power & Light, supplies about 10.5 million customers in the northeastern U.S. The stock is a strong dividend performer with a 4.2 percent yield. PPL stock had a great run in early 2017 but has moved in a trading range since early June. This stock has a low beta of -0.08, indicating it has little correlation to moves of the broader market.
PG&E (PCG). The California-based PG&E is one of the largest utilities on our list with a market cap exceeding $29B. The stock is under pressure, down by 17 percent in the past month. In early October, it was suggested that the utility may have some tie to the wildfires which recently swept through the San Francisco Bay area. This stock should be approached with caution but is looking attractively valued based strictly on fundamental measures.
Entergy Corp. (ETR). The electric utility provides service in Louisiana, Arkansas, Mississippi and Texas. Entergy's stock price has declined almost 9 percent over the past month. On Oct. 25, the company announced strong third-quarter results which beat analyst earnings estimates by a wide margin. As a result of its recent price slide, Entergy has the lowest forward P/E on our list at 14.1.
Molson Coors Brewing Co. (TAP). From the consumer staples sector, TAP makes our list with a 13.7 forward P/E and a 2 percent dividend yield. The stock has traded down over the past two weeks on news of soft earnings at competitor Heineken. This stock is looking very well valued and is part of an industry (alcoholic beverages) which has in the past been very defensive in market declines.
