The S&P 500 includes 500 of the largest U.S. corporations in the stock market, many of which are leaders in their respective industries. Yet not every company in the S&P 500 is equally safe as an investment, and owning the wrong stocks can leave you exposed to massive losses if the market turns against you.
A couple of weeks ago, we looked at a metric called beta, which represents one way of measuring the risk of a stock. Beta looks at a stock’s rises and falls in response to changing market conditions in the past. Using S&P Capital IQ’s data on beta as our guide, let’s look at the five riskiest S&P 500 stocks over the past five years.
A trio of insurance stocks
Topping the high-beta list are three insurance companies: American International Group Inc (NYSE:AIG), Genworth Financial Inc (NYSE:GNW), and Hartford Financial Services Group Inc (NYSE:HIG) , all of which weigh in with betas above 3. Unfortunately, most investors are far too familiar with the risks that caused AIG’s downfall in 2008, as extremely high derivatives exposure left the company overexposed to the mortgage meltdown. Similarly, a combination of poor investment returns and liability for guarantees made to policyholders on annuities and variable life insurance policies brought Hartford to the brink during the financial crisis, while Genworth’s mortgage-insurance business created massive potential liability when home prices plunged.
Yet all of these companies have taken steps to reduce their risk lately. American International Group Inc (NYSE:AIG) has cut its derivatives exposure and sold off many of its assets to focus on its core insurance businesses, and improving business conditions have sent its book value soaring. Genworth has benefited from home prices having hit bottom as well as from new financing activity boosting its mortgage-insurance business. Hartford has arguably made the most dramatic steps, having taken steps to concentrate on property-casualty insurance by choosing not to write new annuities and selling off its retirement plan and individual life insurance businesses. Concentrating on areas of strength should help all three companies going forward, and rebounds in their share prices express investors’ confidence in the moves.
2 other risky plays
Rounding out the top five are Marathon Petroleum Corp (NYSE:MPC) and Wyndham Worldwide Corporation (NYSE:WYN), with betas of 2.97 and 2.94, respectively. For Marathon, the figure reflects its entire roughly two-year history as a spun-off refinery business, and over that time, spreads between prices of cheap U.S.-produced crude oil and more expensive refined products have sent shares soaring. But as its recent drop shows, the threat of environmental regulation and higher costs looms large over the industry, and if spreads return to normal levels, a reversal could come quickly for Marathon.