There is no hard and fast rule that lucrative returns can only come from risky securities. Many strategies show that investing in low-risk portfolios end up giving you handsome returns.
Since risky stocks underperform market amid a bearish business scenario, it could be a good idea to consider some key parameters to create a portfolio of low-beta stocks.
Beta measures the volatility or risks to a security relative to the market (we are considering the S&P 500 here). That is, beta measures the extent to which the price of a stock moves with respect to the market.
If the beta is equal to 1 it means that the stock is as volatile as the market. So, a stock is relatively more volatile if it has beta greater than 1 and less volatile if beta is less than 1.
For example, if the beta is 1.8 then the stock will witness 80% more movement than the market. Hence, we can say that if the market goes up, the stock will outperform by 80%. Conversely, if the market plunges, the stock will lose much more value than the market.
Building a Low-Risk Portfolio
In order to find stocks with lower-than-market volatility, we added beta between 0 and 0.6 as our main criterion for screening. However, we need to keep in mind that low beta is not the only metric to be considered for choosing stocks in a volatile market. Hence to reach the winning strategy, we have considered a few additional criteria.
Percentage Change in Price in the last 4 Weeks: We considered those stocks that saw positive price movement over the last month.
Average 20 Day Volume greater than or equal to 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 fit the bill:
Headquartered in Rotterdam, the Netherlands, Unilever NV (UN - Free Report) is leading consumer good company selling products across the world. The company is likely to see earnings growth of 2.2% through 2019.
Rent-A-Center, Inc. (RCII - Free Report) — headquartered in Plano, TX — helps its customers own computers, appliances, consumer electronics etc. under flexible rental purchase deals. The company is likely to see earnings growth of 77.4% and 8.2% through 2019 and 2020, respectively.
Headquartered in New Albany, OH, Abercrombie & Fitch Co. (ANF - Free Report) is a specialty retailer. The company beat the Zacks Consensus Estimate in each of the prior four quarters, the average positive earnings surprise being 88.3%. For fiscal years 2020 and 2021, the stock is likely to see earnings growth of 21% and 2%, respectively.
Based in Haifa Bay, Israel, Taro Pharmaceutical Industries Ltd (TARO - Free Report) is a leading pharmaceutical firm, providing premium healthcare products. The company has an average positive earnings surprise for the last four quarters of 5.5%. For the year ended Mar 31, 2019, the company is expected record earnings growth of almost 29%.
PCTEL, Inc. (PCTI - Free Report) , headquartered in Bloomingdale, IL, is a manufacturer and designer of precision antennae. The company posted an average positive earnings surprise of 25% for the prior four quarters. The stock is also likely to witness earnings growth of 300% and 37.5% through 2019 and 2020, respectively.
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.
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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.