BACK IN JANUARY

So what's an investor to do? In the stock market, Bernstein recommends seeking out low-risk issues.

To get a handle on risk, professional investors turn to a gauge called beta, a measure of past volatility. Technically, it's a coefficient expressing how much a stock has moved in relation to a benchmark we use the Standard & Poor's 500, as do most money managers, and we consider 1.0 the benchmark level. For example, Yahoo!'s beta weighs in at 3.6, meaning it has historically moved 3.6% for every 1.0% the S&P has moved. No wonder there's an exclamation point at the end of the company's name. Such volatility is great when the market soars, but potentially disastrous during a broad sell-off. For every 1% the S&P falls, Yahoo! falls 3.6%.

Right now, low beta seems to be the way to go. Bernstein's colleague at Merrill Lynch, Satya Pradhuman, noted on Monday that, since October, "stocks with high beta have gained a whopping 44.0%, while low-beta stocks had an almost flat 0.4%." After such a big bounce, Pradhuman is cautious about high-beta issues. That's why he recommends "ratcheting down one's beta."

In search of quality low-beta names, we turned to our stock screener. We started with our database of more than 8,000 stocks and threw out those with betas greater than 0.5. In other words, we wouldn't even consider stocks unless they were less than half as volatile as the S&P 500 meaning they budged only 0.5% for every 1.0% the S&P moved. Note that negative betas are possible, too. Some stocks tend to move in the opposite direction from the benchmark. (Gold stocks often have negative betas.)

Of course, by its very definition, beta looks backward. We also wanted stocks that will continue a steady course in the future. To that end, we sought out the market's better bargains. Reasoning that stocks with lower price-to-earnings (P/E) multiples are less speculative, we looked for stocks that trade for less than the S&P 500's median P/E (which was 17.8 at press time). We also weeded out microcaps, which are less liquid than stocks with larger valuations and thus more volatile. We set our minimum market cap at $250 million.

We also demanded that our candidates have posted total returns over the past five years greater than the S&P average of 7.3%. Remember, total returns include both price appreciation and dividend payments. While we didn't explicitly screen for dividend-paying companies, a number of our survivors pay out nicely to shareholders. Dividends, of course, also help minimize downside risk, so it's no coincidence that so many low-beta names come with nice yields. We like to think Aesop was right: Slow and steady can win the race.

After all of those steps, we found ourselves with a group of 38 stocks. On our list were utilities, financials, consumer goods, restaurant chains and tobacco companies.

In terms of valuations, earnings prospects, volatility and historical returns, Yum! Brands stood out. The company responsible for Taco Bell, Kentucky Fried Chicken and Pizza Hut announced Wednesday that it expects to meet analysts' earnings expectations for this quarter. Yum also boasted about the success of its stores that combine Taco Bell, KFC and Pizza Hut under one roof. Thanks to this "multibranding," and the potential for overseas growth, the company expects to increase its earnings per share by 10% per year over the long term.

The stock's valuation based on 2002's expected results seems appetizing. Fellow fast-food chain Wendy's, which met all of the requirements of our low-beta screen, trades for more than 14 times this year's expected EPS, while Yum trades for less than 12. Moreover, the very liquid stock has tended to move just a third as much as the S&P 500, which is good to know if the market takes another nose dive. But if you're looking for dividends, Yum will leave you hungry. It's one of only three of our 38 survivors that didn't payout dividends in the past year. For a dose of dividends, we liked the yields on our electric utilities.

Note that electricity providers Dominion Resources and DTE Energy paid out about 5% of their current share prices as dividends last year. That's more than twice the yield of the average stock in the S&P 500. Merrill's Bernstein argues that boring but predictable utilities should outperform the broader market in the year ahead particularly ones with fat dividend yields.