If having a Diet Coke from Coca-Cola (NYSE:KO) is on the tip of your tongue the next time a waiter or waitress asks you what you'd like to drink with a meal, you may be quickly offered a Diet Pepsi from PepsiCo (NYSE:PEP) instead. Personal preferences aside, beverage providers can offer stability to an otherwise volatile portfolio. Let's take a look at why soft drink producer stocks are looking like a refreshing choice over financials and automotives. (For background reading, see Parched For Profits? Try Beverage Stocks.)
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Smoothed by Beta
A stock's beta relates to how it responds to the up and down swings of the overall stock market as measured by a broad index like the S&P 500 Index. A stock with beta of 1 suggests that a 5% increase or decrease in the S&P 500, or a tracking investment like the SPDRS S&P 500 Index ETF (NYSE:SPY), will translate into a nearly identical move by the stock. Likewise, a stock with a lower beta, let's say 0.5, may only move up and down half as much as a stock with a beta of 1. (For related reading, check out Beta: Know The Risk.)
Pepsi's Beta Challenge
Pepsi's stock has fallen 1.62% since the beginning of the year, while the SPY ETF has moved just above 5.12% over the same time frame. Although investors in Pepsi may not be smiling as much as investors holding SPY over this brief period of time, long-term investors who have been invested over the past five years do have reason to cheer.
Pepsi's stock from March 2006 until March 2011 has gained about 8%, while the SPY ETF gained only 3% of its value over the same time frame. Although beta is not a golden rule for determining the volatile nature of a stock, it is a starting point for investors as they begin conducting their own research. (For more, see Beta: Gauging Price Fluctuations.)
Coke's Beta Buffer
In a similar fashion Coke, with its beta of 0.60, has fallen around 0.4% since the beginning of the year. Most impressively, Coca-Cola has gained 57% since 5 years ago.
Not So Similar
For further comparison in the soft drink industry, investors can also take note of Dr Pepper Snapple Group (NYSE:DPS). Dr Pepper Snapple has a beta of 0.90 and its stock has increased more than 46.7% since it started trading in May 2008; it has already surge over 7.7% year to date.
A portfolio with heavy doses of financial services like Citigroup (NYSE:C) or automotive companies like Ford (NYSE:F) are exposed to stocks with relatively high beta ratios of 2.55 and 2.48 respectively. Investing in soft drink industry players is less likely to take the fizz out of your portfolio, but may smooth the ride for portfolios in need of an individual stock beta checkup.
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