The U.S. economy remains in relatively good shape, as unemployment is at multi-decade lows while consumer spending remains strong.
There are, however, some indicators that point towards a potential downturn over the coming quarters. These include declining manufacturing activity, and the ongoing trade war with major trading partners such as China.
As a result, there is at least a possibility that a stock market downturn is possible in the near future.
In such a scenario, a stock that does not decline as much as the broader market could help stabilize your portfolio. One metric that measures the volatility of a stock versus a benchmark such as the S&P 500 index is called beta. Beta value of 1.0 means that a stock matches the benchmark’s volatility. Beta values above 1 indicate that a stock is more volatile than the S&P 500, while beta values below 1 suggest that a stock is less volatile than its benchmark.
In rarer cases, there are negative beta stocks, which means that their share price is inversely correlated to the S&P 500’s returns. When the index moves up, the negative beta stock typically declines, and vice versa. Fox Corp. (FOX), (FOXA) is a negative beta that could generate positive returns in a falling stock market, due to its negative beta.
Company Overview and Growth Outlook
Fox Corporation was created in 2018, when Disney acquired the majority of 21st Century Fox’ assets. The newly-created Fox owns news, sports, and entertainment assets, including FOX News, sport national networks FS1 and FS2, and Big Ten Network, a video programming service. Fox generates about $12 billion in revenues annually, and is trading at a market capitalization of $20 billion.
Fox reported its most recent quarterly results in August, announcing that its revenues grew 5% year over year, with growth across its Cable Network Programming and its Television business. The company also easily beat analyst estimates for its profits, as Fox recorded earnings-per-share of $0.62 during the quarter. The company is not active in a high-growth industry, but we believe that Fox should be able to grow its revenues at a low single-digit pace going forward, through increasing ad revenues, and higher TV affiliate fees.
Fox should generate ample free cash flows over the coming years that can be used for share repurchases and dividends. Through revenue growth and the positive impact of a declining share count, Fox is expected to grow its earnings-per-share at a mid-single-digit rate in the long run.
Fox as a Defensive Investment With Upside Potential
Fox is one of just three S&P 500 stocks with a negative beta, which should result in outperformance during a market downturn. Fox pays a dividend of $0.23 per share, which is paid semi-annually, resulting in a yield of 1.4% at current prices. Shares are also trading below fair value, at just 13 times our forecast for this year’s net profits, while we see upside potential towards a fair earnings multiple of ~15.
Fox may not offer gigantic total returns over the long term, but through its dividend, some multiple expansion potential, and some earnings-per-share growth, a high single-digit annual return seems achievable. On top of that, the negative correlation to the S&P 500’s movements in the short-term, due to Fox’s negative beta value, could result in relative outperformance in case markets drop from current levels. The combination makes Fox a viable investment for defensive investors interested in stabilizing their investment portfolios during a market downturn.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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