5 Calm Stocks for Any Market

Down 90 yesterday. Up 40 today. Welcome to volatility, 2012-style. Indeed, as of Feb. 15 there wasn't a single trading day this year where the Dow Jones Industrial Average finished down 100 points or more. For many investors, it's a refreshing change from last year, when triple-digit swings were the norm. But many pros say don't get used to it. In a recent survey conducted by Northern Trust, more than 40% of institutional money managers expected volatility to increase over the next six months. After all, the European debt crisis still hasn't been resolved and the U.S. economy isn't exactly robust. "You're going to have periods of fear and volatility," says Gary Flam, portfolio manager at Bel Air Investment Advisors.

The strategy is hardly sexy. Companies with less-volatile stocks are typically mature, slow-growing businesses, as opposed to those with dramatic increases in sales or profits each quarter. (In other words, you're not likely to find a Google or Coach among them.) But not all fit the bill. The key, say experts, is to find firms that are generating cash as well. "If you are essentially going to close your ears to the risk on-risk off nature of the market and hold on for the long run, these can work," says Jay Kaplan, comanager of the Royce Total Return fund.That's why many pros still want to own the stocks of stable businesses, ones that won't buckle when volatility returns. A strategy of finding so-called calm stocks paid off during the market's manic 2011. Investing in the S&P 500 stocks with the lowest volatility relative to the broad market in 2010 returned nearly 10% in 2011, while the most volatile fell, on average, 19%, according to Bespoke Investment Group. The results are even better over the long run. From 1968 to 2008, $1 invested in low-volatility large-company stocks grew to $53.81, while $1 invested in the higher-volatility bunch grew to just $7.35, according to a 2011 paper in Financial Analysts Journal cowritten by Harvard finance professor Malcolm Baker.

Channing Smith, who comanages the Capitol Advisors Growth fund, says he hunts for low-drama names by looking at measures such as beta, which gauges a stock's sensitivity to the market. A stock with a beta of 1.0, for instance, moves in the same direction as the broad market, and with the same magnitude. The lower the beta, the less likely it is that their moves are tied together. Smith, who says he's "pretty bearish" on equities these days, has been searching for low-beta stocks, such as health-care stalwart Johnson & Johnson, which currently has a beta of 0.6. (The company's stock has traded within a narrow $12 range over the past 24 months.)

Of course, some steady performers are not cheap. Utilities, for example, trade at a 15% premium to the market, a big change from the slight discount they had at the beginning of 2011. But paying a higher price is a trade-off many pros are willing to make. "If we have good news in the economy, or Europe solves its issues, you will still make money," says Kent Croft, comanager of the $312 million Croft Value fund. And if the worst happens? Well, he says, those stocks "will hold up better."