Paul R. La Monica
Megacap tech stocks have slid this year due to uncertainty about tariffs, inflation, and the direction of the economy. Their future may remain cloudy due to their premium valuations, and worries that earnings estimates are too high. But not all growth stocks are risky tech giants, and some should weather the storm better than others.
Leuthold Group senior research analyst and portfolio manager Greg Swenson wrote in a report last Friday that stocks with a lower beta, a measure of how volatile they are compared with the broader market, should hold up better during these uncertain times.
But he also identified nine growth stocks that have relatively low betas. So they should do reasonably well if the market continues to slide.
Several are in the healthcare sector: GLP-1 makers Novo Nordisk and Eli Lilly as well as fellow Big Pharma companies AstraZeneca and Bristol Myers Squibb. These four drug makers all have betas of 0.4 to 0.6. A beta of less than 1 means that a stock tends to not move as much as the S&P 500.
Of course, that doesn't mean that these stocks are entirely risk-free. Novo Nordisk stock, for example, fell 2% Monday (while the broader market was rallying) after the company agreed to pay $2 billion to license a weight-loss drug from Chinese pharma company United Laboratories International.
But in general, pharma, and other healthcare stocks have been bright spots this year in a rough market. Bristol Myers Squibb shares are up 8% so far in 2025, while Lilly and AstraZeneca stock have each rallied more than 10%. The Health Care Select Sector SPDR exchange-traded fund is up 7%, as investors have flocked to the sector thanks to stable earnings growth and high dividend yields.
Allstate, Chipotle Mexican Grill, home builder D.R. Horton and two tech companies -- cybersecurity firm Fortinet and payments processing leader Fiserv -- also made the cut as high growth with lower beta stocks.
These five stocks do have higher betas than the healthcare stocks, though. Allstate, Fortinet and Fiserv have rallied as the broader market has pulled back.
Chipotle, which has been buying back stock, and D.R. Horton have tumbled due to near-term worries about inflation and the broader economy hurting consumer spending and the housing market. However, both have solid long-term growth potential, with analysts forecasting nearly 13% earnings growth, on average, over the next few years for Chipotle, and a long-term growth rate of 18% for D.R. Horton.
Lower-beta stocks in general have been a winning trade so far this year. Along those lines, the SPDR S&P 500 Low Volatility ETF is up 1.6% this year, while the S&P 500 is off more than 2%, and the Nasdaq Composite has tumbled 6%.
Large-cap stocks with low volatility have fared even better. The SPDR SSGA US Large Cap Low Volatility Index ETF, which has Walmart, Colgate-Palmolive and PepsiCo as top holdings, is up more than 4%.
On the flip side, the big-tech stocks tend to have higher betas. Nvidia and Tesla, for example, have betas near two -- twice the volatility of the S&P 500. In fact, Swenson wrote that the correlation between growth and beta is "more elevated than any time during the 2020 meme bubble, and matches that reached before the Tech Bubble burst" in 2000.
That comment doesn't bode well for the near-term performance of riskier, expensive tech stocks. "Combined with still pricey relative valuations, growth names are primed to get hit hard during any risk-off episode," Swenson added.
Write to Paul R. La Monica at paul.lamonica@barrons.com
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March 24, 2025 12:41 ET (16:41 GMT)
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