As we enter the most volatile period of an otherwise troubled year, most of us are wondering whether there’s anything left to do to protect and grow our savings. Or, if we’re really unlucky, minimize our losses.
And we’re equally aware that while volatile markets offer many opportunities for gains, those gains come at increased risk. So for the most risk-averse amongst us, the best advice would probably be to “do nothing” right now.
Because even if we’re only thinking of real safe stocks, we’d quickly find out that safety is a relative word. Market dynamics are totally unpredictable at this point and likely to get more so.
So what should we expect for the rest of the year?
The last Zacks Earnings Trends report that some of us may already be familiar with, says that S&P 500 companies are expected to report an earnings decline of 23.9% and revenue decline of 3.2% on average, following a very weak Q2 when we saw the lowest earnings growth since the 2008 recession. The current estimate revision trend indicates that growth rates will further improve in the final three months of the quarter. The S&P 500 is a good indicator of market conditions because of the way industries are represented in the index.
But even the broader market indicators are all positive and point to a gradual recovery through the rest of the year. I would be surprised if tech spending slows down, or any other area of consumer spending for that matter. While somewhat dependent on when people gain access to a vaccine, holiday spending will be another boost. Construction and auto will be seasonally slower while airlines and hospitality, although weak, will continue to improve.
Given the backdrop, there should have been more options to go for. But rich valuations coupled with election-driven uncertainties are limiting our choices.
So what can we consider as “safe” in this environment?
To answer this question, we have to revisit our goals with regard to the period of holding (short-term/long-term) and our preferred nature of investment (growth/value). We should also be prepared to stomach a small amount of risk.
A big market crash seems unlikely, but whether gains will be substantial is the big question. And just because there isn’t a market crash, it doesn’t mean that your holdings won’t depreciate in value. Finding stocks that are unlikely to depreciate and stocks that pay some sort of income would constitute a safety strategy.
Another thing you may want to consider is the stock’s beta, which should be as close to 1 as possible in a high-volatility environment. A beta below 1 indicates that the stock responds slower than the market while a beta over 1 indicates that it is more volatile, so it responds more than the market. It follows that in a bull market, a more volatile stock will give greater returns while in a bear market that same stock will yield greater losses than the market.
However, a negative beta stock is different and should be avoided unless you’re expecting the market to decline. That’s because negative beta indicates negative correlation with the market, i.e. movement in the opposite direction as the market, so it indicates positive results if the market falls.
Since I’m not expecting a market crash and only trying to minimize volatility, I’m looking at stocks with a beta close to 1.
Let’s take a look at some examples-
First, we have Best Buy (BBY - Free Report) , which is a Zacks Rank #2 (Buy) stock with Value, Growth and Momentum Scores of A, operating in the attractive Zacks-classified Retail-Consumer Electronics industry.
It has seen a 26.2% increase in its 2020 estimates and 12.4% increase in 2021 estimates over the last 30 days.
It offers a dividend that yields 2.07%.
Significantly, its beta is 1.64.
As far as valuation is concerned, its current multiple of 0.61X forward sales, while being higher than its median value of 0.49X over the past year, is nevertheless lower than the annual high of 0.69X. It’s particularly attractive because the S&P 500 is at its annual high of 4.53X.
Second in line is DICKS Sporting Goods (DKS - Free Report) . With its Zacks Rank #1 (Strong Buy), Value and Growth Scores of A, and operating in the attractive Retail-Miscellaneous industry, this stock is a great pick.
The last 30 days have seen its 2020 and 2021 estimates move up a respective 1103.6% and 33.2%.
Its dividend yields 2.28%.
The beta is 1.72.
This stock is trading at a P/S multiple of 0.54X, which is between the median value of 0.42X and the high of 0.58X. So valuation is attractive.
Third is The Mosaic Company (MOS - Free Report) with its Zacks #2 Rank and Growth and Momentum Scores of B. The Fertilizers industry, of which it is a part, is also attractive, being in the top 50% of Zacks-classified industries that typically outperforms the bottom 50% by a factor of more than 2 to 1.
Earnings estimates for 2020 and 2021 are up 52.9% and 17.8%, respectively in the last 30 days.
Its dividend yields 1.08%.
The beta is 1.93.
MOS is trading at 0.85X on a P/S basis, which is between its median value of 0.80X and high of 0.99X over the past year. So valuation is attractive.
Fourth is Williams-Sonoma (WSM - Free Report) , which operates in the attractive Retail-Home Furnishings industry. The Zacks Rank #1 company has Value and Growth scores of B and a Momentum Score of A.
Its earnings estimates for 2020 and 2021 are up 35.3% and 21.9%, respectively in the last 30 days.
Its dividend yields 2.27%.
The beta is 1.66.
WSM is trading at 1.06X forward sales, which is between its median and high points of 0.94X and 1.30X, respectively, over the past year. So valuation is attractive.
Next we have Bunzl (BZLFY - Free Report) . With its Zacks #2 Rank, Value Score B and Growth and Momentum Scores of A, this is another good pick. It operates in the attractive Diversified Operations industry.
2020 and 2021 estimates are up 26.8% and 16.0%, respectively.
Its dividend yields 2.70%.
The beta is 0.85X.
At 0.86X forward sales, the stock is currently trading between its median value of 0.75X and high of 0.96X. So valuation is attractive.
Finally, we have Target (TGT - Free Report) with its Zacks Rank #1, Value Score B and Growth and Momentum Scores of A. It operates in the attractive Retail-Discount Stores industry.
Its 2020 and 2021 earnings estimates are up 44.3% and 15.1%, respectively, in the last 30 days.
Its dividend currently yields 1.85%.
The beta is 0.87.
Its P/S multiple of 0.84X is between the median value of 0.73X and high of 0.93X over the past year. So valuation is attractive.
This is a dynamic market, so safety isn’t in absolutes. The idea is to minimize your risk by selecting players that are part of attractive industry groups, have a good estimate revision history and also offer some income. Each of these things works against downside pressure. The low beta and relatively saner valuation further protects against downside risk.
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