BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

The Juan Soto Trade Has Helped Both The Yankees And The San Diego Padres
Senate Passes Aid Package For Ukraine And Israel In Bipartisan Vote
Fully Electric G-Wagen Unveiled In Hollywood, But No EPA Range Yet
Government Overreach, The Threat To Civil Liberties: The Contested Extension Of FISA Section 702
If You Work From Home, Here’s 6 Tips To Create The Perfect WFH Office
First Look: Mercedes-Benz Geländewagen Goes All-Electric
Edit Story

The Most- And Least-Risky S&P 500 Stocks

This article is more than 10 years old.

One school of thought about stock investing says that investors are hoping to be paid for shouldering risk. During the technology bubble, risky stocks offered great rewards for a short period of time, while more-stable stocks generated lower returns. As we all know, many investors were punished severely for taking such high risk on speculative companies.

What do we mean by risk? The textbook definition: the possibility of losing or not gaining value. New York-based RiskMetrics Group, a 1998 spinoff from J.P. Morgan , has its own proprietary method for quantifying the risks in individual stocks, indexes and mutual funds.

RiskMetrics examines price movements over the last 250 trading days, weighted so that the most recent 11 trading days account for 50% of the overall assessment. It's an attempt to quantify the amount of worry that the market is expressing over any given stock. RiskMetrics scores currently range from 21 (representing a security that almost never changes in value) to 22,344, out of the universe of U.S. stocks.

"High-risk stocks are surrounded by anxiety," says RiskMetrics strategist Michael Thompson Michael Thompson . "The market absorbs information, but when it's not sure of itself we get dramatic price swings. That's where the risk is."

RiskMetrics currently gives the S&P 500 a risk grade of 75. Based on this assessment, an argument can be made for investing in the S&P index, which, as a whole, is graded just 15 points riskier than the average score for its ten most reliable (least risky) stocks.

The table below highlights RiskMetrics' selection of the least- and most-risky stocks in the S&P 500. Thompson calls the list "ten stocks the market is certain about and ten stocks where the market is unsure."

Among the low-risk S&P companies are Procter & Gamble , General Mills and Hershey Foods . Meanwhile, telecommunications equipment firm Tellabs and semiconductor manufacturer Applied Micro Circuits have more than four times the risk of the S&P 500.

It's important to remember that risk is neither good nor bad. A stock that has doubled in three months will be riskier than a stock that has dropped 3% in that time frame. But it also means that investors who focus on low-risk stocks are likely to earn lower overall returns.

Procter & Gamble, for example, is up just 12% this year, as is Hershey Foods. In contrast, the S&P 500 has a 19% year-to-date gain, and Novell is up 84%. Of course, enduring risk is no guaranty of return: Tellabs is up just 7% year-to-date. Its risk grade of 311 makes it 5.3 times riskier than Hershey Foods, and yet Hershey delivered the greater return.

As is often the case during a market rally, risk takers are being handsomely rewarded. The average stock from the basket of the ten S&P stocks with the least risk has an average risk score of 60 and an 8% return so far this year. The ten most risky S&P stocks have an average risk grade of 311 but a 77% return.

Lowest-Risk Stocks Of The S&P 500 Prices as of Oct. 14. YTD: Year-to-date. P/E: Price-to-earnings ratio. Source: RiskMetrics Group; FT Interactive Data and Thomson First Call via FactSet Research Systems
Company Risk Grades Price YTD Price Change 2004 Estimated P/E Market Value ($mil)
United Parcel Service 53 $67.40 7% 25 $35,723
Ameren 54 43.94 6 15 7,105
General Mills 58 44.87 -4 14 16,753
Hershey Foods 59 75.57 12 19 7,571
Peoples Energy 60 41.45 7 14 1,520
W. Wrigley Jr. 62 56.24 2 25 10,339
Alberto-Culver 63 61.20 21 20 1,979
Genuine Parts 63 32.48 5 15 5,649
Procter & Gamble 63 95.99 12 21 124,454
H.J. Heinz 64 35.67 9 15 12,544
Highest-Risk Stocks Of The S&P 500 Prices as of Oct. 14. YTD: Year-to-date. P/E: Price-to-earnings ratio. NM: Not meaningful. Source: RiskMetrics Group; FT Interactive Data and Thomson First Call via FactSet Research Systems
Company Risk Grades Price YTD Price Change 2004 Estimated P/E Market Value ($mil)
Citrix Systems 301 $26.86 118 34 $4,420
Sanmina-SCI 301 10.83 141 57 5,525
Applied Micro Circuits 302 5.76 56 NM 1,755
Novell 308 6.15 84 27 2,297
Monster Worldwide 310 27.23 157 48 2,928
Nvidia 311 17.21 50 26 2,764
Tellabs 311 7.78 7 NM 3,212
ADC Telecommunications 315 2.76 32 64 2,221
Sun Microsystems 320 3.62 16 NM 11,731
Power-One 328 12.00 112 NM 997

More Stock Focus Columns