Securities with significant exposure to markets perform well only when the market is bullish. Such stocks generally underperform the market when investor sentiments are bearish. Presently, the global market seems uncertain as fresh trade tensions are brewing between the United States and China.
Hence, to tide over market volatility, we have presented a strategy to create a portfolio of low-beta stocks that are likely to reward investors with stable returns.
Meaning of Beta
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 10 stocks that fit the bill:
lululemon athletica inc. LULU, based in Vancouver, Canada, is a provider of athletic apparel. The company managed to beat the Zacks Consensus Estimate in each of the prior four quarters, the average positive earnings surprise being almost 20%. The company will likely see earnings growth of 21% and 16.1% in fiscal year 2019 and 2020, respectively.
Rent-A-Center, Inc. RCII — headquartered in Plano, TX — helps customers own computers, appliances, consumer electronics etc. under flexible rental purchase deals. The company beat the Zacks Consensus Estimate in the prior four quarters, the average positive earnings surprise being 74%.Rent-A-Center is likely to see earnings growth of 80.2% and 19.2% through 2019 and 2020, respectively.
Headquartered in Kearney, NE,The Buckle, Inc. BKE is a leading retailer of footwear and casual apparel. The company managed to surpass the Zacks Consensus Estimate in three of the last four quarters, the average positive earnings surprise being 4.2%.
Headquartered in Pembroke, Bermuda, Argo Group International Holdings, Ltd. ARGO, is primarily involved in underwriting reinsurance products. The company beat the Zacks Consensus Estimate in the last four quarters. Through 2019 and 2020, the stock is likely to grow 30.4% and 9.1%, respectively.
FTI Consulting, Inc. FCN, headquartered in Washington, District of Columbia, is primarily involved in providing services related to business advisory. The company beat the Zacks Consensus Estimate in the last four quarters. FTI Consulting is likely to see earnings growth of 6% and 2% in 2019 and 2020, respectively.
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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.
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Rent-A-Center, Inc. (RCII) : Free Stock Analysis Report
Buckle, Inc. (The) (BKE) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
FTI Consulting, Inc. (FCN) : Free Stock Analysis Report
Argo Group International Holdings, Ltd. (ARGO) : Free Stock Analysis Report
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