We explained during the February Members-Only call we didn’t see that happening, but as we thought about it, we wanted to discuss beta, a metric that measures the expected move in a stock relative to the overall market. The market is assigned a beta of 1.0, and the degree to which a particular stock’s beta is higher than that, the more volatile it is likely to be. At the same time, the further below 1.0 a stock’s beta is, the less tied to moves in the market it tends to be.
Pretty simple, but let’s use some examples to clarify.
Let’s put some examples around that.
According to data compiled by Bloomberg, here are the betas for the following portfolio positions as measured against the S&P 500:
American Water Works (AWK) : 0.95
Apple (AAPL) : 1.17
Axon Entreprises (AXON) : 1.35
ChargePoint (CHPT) : 1.53
Costco (COST) : 1.07
Coty (COTY) : 1.16
Elevance (ELV) : 0.73
Ford Motor (F) : 1.35
Lockheed Martin (LMT) : 0.71
PepsiCo (PEP) : 0.67
United Rentals (URI) : 1.28
Verizon (VZ) : 0.52
As you can see, CHPT shares have one of the higher betas in the sampling of portfolio positions, which helps explain its somewhat volatile nature.
When we contemplate adding a position to the Bullpen we naturally focus on the opportunities and risks for the business, industry and what that means for the valuation. We have also looked at what each new position may do to the overall beta of the AAP portfolio. Because we are in a bear market, we have shied away from higher beta stocks but as we’ve shared with members several times, we are watching a short list of stocks that do have higher betas compared to those listed above. For example:
Applied Materials (AMAT) : 1.53
Marvell Technology (MRVL) : 1.51
Universal Display (OLED) : 1.25
Qualcomm (QCOM) : 1.20
Adding those to the mix would likely have made for wider swings in the portfolio during a time when we’ve seen the market trade in a narrow channel essentially since May of last year, one that was also rather volatile, as well. Recognizing we were in a bear market and given our concerns about where the Fed may have needed to take interest rates as well as concerns over 2023 EPS expectations for the S&P 500, we leaned into lower beta names like Elevance, Verizon , PepsiCo and others.