Most investors believe that only risky stocks can generate healthy returns. Those securities perform extremely well when the market is bullish. However, since the performances of risky stocks are positively correlated with market movements, the converse scenario should also be taken into account.
After thorough research and analysis, we have developed a strategy which testifies that low-risk stocks can also fetch lucrative returns when some other parameters are considered.
Meaning of Beta
Beta indicates the volatility of a particular stock with respect to the market. In other words, beta measures the extent of stock price movement relative to the market (we are considering S&P 500 here).
If a company has a beta of 1, it means that the relative volatility of the stock is the same as that of the S&P 500. In the same way, if the stock’s beta is greater than 1 then it is more volatile compared to the market. Conversely, a beta below 1 signifies less volatility.
Now, if a portfolio’s beta is 3, it is three times more volatile than the market. Hence, if the market is projected to give 20% return, the portfolio will then definitely contribute 60% return which is amazing.
However, the opposite case also holds true. If the market slips 20% then the portfolio return plummets 60% which is surely a matter of concern.
The Winning Strategy
In our screening criteria we included beta in the range of 0 to 0.6 for short listing low risk stocks. But this can’t be the only criterion for betting on stocks. The other parameters that need to be added to create a winning portfolio are:
Percentage Change in Price in the Last 4 Weeks greater than zero: This ensures that the stocks saw positive price movement over the last one month.
Average 20 Day Volume greater than 50,000: A substantial trading volume ensures that the stocks are easily tradable.
Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.
Zacks Rank equal to 1: Zacks Rank #1 (Strong Buy) stocks indicate that they will significantly outperform the broader U.S. equity market over the next one to three months.
Here are five of the nine stocks that qualified the screening:
Headquartered in Plano, TX, Rent-A-Center, Inc. (RCII - Free Report) is primarily engaged in leasing household durable goods. The company will likely post earnings growth of almost 80% through 2019.
Abercrombie & Fitch Company (ANF - Free Report) , headquartered in New Albany, OH, is one of the world’s elite specialty retailer for apparel. The company beat the Zacks Consensus Estimate in all the prior quarters. For fiscal 2018 and fiscal 2019, the stock will likely see respective earnings growth of 41.5% and 4.5%.
Headquartered in Austin, TX, Upland Software (UPLD - Free Report) is primarily engaged in providing enterprise cloud solutions. The company beat the Zacks Consensus Estimate in the prior four quarters. Through 2019, the stocks will likely see earnings growth of 25.5%.
Valero Energy Partners LP , headquartered in San Antonio, TX, is the operator of midstream infrastructure energy assets. The stock posted an average positive earnings surprise of 3.7% for the past four quarters. Through 2019, the partnership will likely post earnings growth of 19.8%.
Headquartered in Menlo Park, CA, Exponent, Inc. (EXPO - Free Report) is an engineering consulting player. The company beat the Zacks Consensus Estimate in three of the past four quarters. The company will likely see earnings growth of 6.4% through fiscal 2019.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.