The general belief that only risky stocks generate lucrative returns is not always true. This is because those securities earn handsome returns only when the market is bullish.
In this article, we present a strategy that clearly shows that a low-risk portfolio can also generate impressive returns if some specific parameters are considered.
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 29 stocks that fit the bill:
Headquartered in Costa Mesa, CA, El Pollo Loco LOCO is an operator of a chain of restaurants and is known for citrus-marinated fire-grilled chicken. The company delivered average positive earnings surprise of 5.5% for the prior four quarters. For 2019, El Pollo will likely post earnings growth of 10.1%.
Jabil, Inc. JBL, headquartered in Saint Petersburg, FL, is primarily engaged in offering services related to electronic manufacturing. The stock beat the Zacks Consensus Estimate in the last four quarters. For fiscal 2019 and 2020, the stock will likely post earnings growth of 14.1% and 12.6%, respectively.
Omega Healthcare Investors, Inc. OHI is basically a real estate investment trust with primary capital allocations toward healthcare industry. Omega beat the Zacks Consensus Estimate in all the prior four quarters with the average positive earnings surprise being 2.3%. For 2019, the stock is likely to see earnings growth of 3.1%.
Headquartered in Oakland, CA, Pandora Media, Inc. P is basically a music discovery platform. The stock is likely to see earnings growth of 54.8% through 2019.
Talend SA TLND, based in Suresnes, France, offers solutions related to cloud integration and big data. The company beat the Zacks Consensus Estimate in all the prior four quarters. The stock is expected to post earnings growth of 3.1% through 2019.
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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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