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.
Here are five of the 18 stocks that qualified the screening:
Based in New York, G-III Apparel Group, Ltd. GIII is primarily involved in manufacturing apparel. The company's earnings surprise history looks impressive as the bottom line beat the Zacks Consensus Estimate in the last four quarters. For fiscal 2019 and 2020, the company will likely witness earnings growth of 46.9% and 12.8%, respectively.
lululemon athletica inc. LULU , based in Vancouver, Canada, is among the leading designers of athletic apparel. The firm beat the Zacks Consensus Estimate for earnings in each of the prior four quarters. For fiscal 2018 and 2019, lululemon is expected to record earnings growth of 23.9% and 15.8%, respectively.
Headquartered in Boulder, CO, DMC Global Inc. BOOM is among the leading producers of clad metal plates. The company surpassed the Zacks Consensus Estimate in three of the last four quarters. Through 2018, we expect the stock to record earnings growth of a massive 1,168.8%.
Headquartered in Baltimore, MD, Medifast, Inc. MED is involved in providing weight-loss products. The company surpassed the Zacks Consensus Estimate in each of the prior three quarters. We also expect the firm to post earnings growth of 59.4% and 30.1% in 2018 and 2019, respectively.
KMG Chemicals, Inc. KMG , headquartered in Fort Worth, TX, is among the leading producer of specialty chemicals. The company beat the Zacks Consensus Estimate in the prior four quarters. For fiscal 2018 and 2019, the firm will likely post earnings growth of 64.3% and 6.6%, 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 .
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report KMG Chemicals, Inc. (KMG): Free Stock Analysis Report MEDIFAST INC (MED): Free Stock Analysis Report DMC Global Inc. (BOOM): Free Stock Analysis Report lululemon athletica inc. (LULU): Free Stock Analysis Report G-III Apparel Group, LTD. (GIII): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research