In Search of Almost-Safe Stocks

IS there really such a thing as a safe stock? When you buy a share, you own a tiny piece of a business, and any business can develop problems no one suspects. Consider Enron, a consistent moneymaker in energy trading, which went from $90 a share to 26 cents in a little over a year. Or Sears, once a solid retail giant and now reduced to just a handful of stores. Eastman Kodak, Polaroid and Blockbuster were all solid citizens that went bankrupt.

- STREET SMART BY JAMES K. GLASSMAN

No stock is safe in the sense that a short-term Treasury bill is safe. But looking at a firm's business, its longevity and the performance of its stock in the past, we can make educated guesses about which stocks are likely to provide relatively smooth sailing and limited anxiety.

Consistency beats excitement.

Begin by examining volatility—the extremes of the ups and downs of a stock’s price. Volatility and risk are closely related. A stock that shoots up 80% one year and then falls 35% the next is considered far more risky than a stock that returns 8% in both years—even though both stocks return almost precisely the same over the two years.

Market analysts use a measure called beta to determine the volatility of a stock compared with that of the market over a given period. A beta of 1.0 means a stock’s volatility is equal to the market’s. A beta lower than 1.0 means it’s less volatile; higher than 1.0, more volatile.

For example, Johnson & Johnson (symbol JNJ, $207), which has been making pharmaceuticals and other medical products since 1886, has a beta of just 0.35, meaning its stock has been 65% less volatile than the market over the past five years. During that period, shares have traded in a narrow band, between about $140 and $180, before breaking out in August and climbing above $200. Key metrics including sales and earnings per share have risen annually, with only a few brief dips over the past decade. The balance sheet is impressive. (Stocks I like are in bold; prices and other data are as of December 31, unless otherwise noted.)