Although there is a general belief that only risky stocks can prove profitable, such securities perform well only in bullish market conditions.
Notably, there is a strategy which clearly shows that low-beta stocks can also generate lucrative returns if some specific 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 24 stocks that fit the bill:
Headquartered in Rosemont, IL, US Foods Holding Corp. (USFD - Free Report) is involved in the marketing and distribution of dry, frozen and fresh foods. For fiscal 2019 and 2020, the stock is likely to see earnings growth of 13.3% and 13.2%, respectively.
Genesco Inc. (GCO - Free Report) , headquartered in Nashville, TN, operates as a specialty retailer of footwear and accessories. The stock is likely to see earnings growth of 22.3% and 11% for fiscal 2020 and 2021, respectively.
Thomson Reuters (TRI - Free Report) , headquartered in Toronto, Canada, is a leading provider of customized software, applications and information. In 2019 and 2020, the stock is likely to see earnings growth of 61.3% and 61%, respectively.
Headquartered in Washington, District of Columbia, FTI Consulting Inc (FCN - Free Report) primarily offers services related to business advisory. For 2019, the stock is likely to see earnings growth of 48%.
Ellington Financial Inc. (EFC - Free Report) is primarily involved in investing various financial assets, comprising consumer loans, mortgage-backed securities, etc. In 2019, the stock is likely to see earnings growth of 26.2%.
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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.