Market Volatility Is Not A Concern: Buy 5 Low-Beta Stocks

Creating an investment strategy involves intensive research based on micro and macro analysis and building business models on realistic assumptions. There is no such rule that only risky stocks can generate handsome returns, as those securities do prove unprofitable when the market turns bearish.

We have presented a strategy that clearly shows that stocks with lower risks can be profitable bets.  

Meaning of Beta

Beta indicates the volatility of a particular stock with respect to the market. In other words, beta measures the extent of stock price movement relative to the market (we are considering S&P 500 here).

If a company has a beta of 1, it means that the relative volatility of the stock is the same as that of the S&P 500. In the same way, if the stock’s beta is greater than 1 then it is more volatile compared to the market. Conversely, a beta below 1 signifies less volatility.

Now, if a portfolio’s beta is 3, it is three times more volatile than the market. Hence, if the market is projected to give 20% return, the portfolio will then definitely contribute 60% return which is amazing.

However, the opposite case also holds true. If the market slips 20% then the portfolio return plummets 60% which is surely a matter of concern.

The Winning Strategy

In our screening criteria we included beta in the range of 0 to 0.6 for short listing low risk stocks. But this can’t be the only criterion for betting on stocks. The other parameters that need to be added to create a winning portfolio are:

Percentage Change in Price in the Last 4 Weeks greater than zero: This ensures that the stocks saw positive price movement over the last one month.

Average 20 Day Volume greater than 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.

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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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