It is a common misconception that only risky stocks offer lucrative returns. In fact, the strategy works well only in bullish market conditions.
In this article we have presented a strategy that clearly shows high returns can also be generated from stocks with lower risks, only if some parameters are considered.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 21 stocks that fit the bill:
Headquartered in Plano, TX, Rent-A-Center, Inc. (RCII - Free Report) is primarily engaged in leasing household products to clients. The company surpassed the Zacks Consensus Estimate in each of the last four quarters, the average positive earnings surprise being almost 50%. Through 2019 and 2020, the stock is likely to see earnings growth of 114.2% and 14.2%, respectively.
Headquartered in Los Angeles, CA, Guess?, Inc. (GES - Free Report) is a global operator of retail stores, which is primarily involved in designing and distributing a wide variety of apparel, watches and other consumer products. In fiscal year 2020 and 2021, the stock is likely to witness earnings growth of roughly 38% and 25%, respectively.
ChannelAdvisor (ECOM - Free Report) , headquartered in Morrisville, NC, has a cloud-based ecommerce platform. The company beat the Zacks Consensus Estimate in the prior four quarters, the average positive earnings surprise being 296.4%. In 2019 and 2020, the stock is likely to see earnings growth of 231% and 27.3%, respectively.
Based in San Jose, CA, TiVo Corporation’s (TIVO - Free Report) primary business is to offer media and entertainment products. For 2019 and 2020, the stock is likely to see earnings growth of 11% and 2.4%, respectively.
Hallmark Financial Services Inc. (HALL - Free Report) , headquartered in Dallas, TX, is a leading casualty and property insurance firm. The company beat the Zacks Consensus Estimate in the prior four quarters, the average positive earnings surprise being 98%. For 2019 and 2020, the stock is likely to see earnings growth of 42% and 12.2%, 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.
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.