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Low Beta - High Growth

Whether you’re seeking fast growing technology stocks, or beaten down value plays, you could probably improve your investing returns by paying attention to “beta.”

About Beta

Beta measures the historical volatility of a stock (or fund) compared to the overall market, typically the S&P 500. A beta above zero, but less than one, tells you that a stock has historically moved in the same direction as the S&P, but not as much. Stocks with beta equal to one have moved in sync with the S&P, while values above one signals higher volatility.

For example, beta of 2.0 says that a stock has moved twice as much as the S&P both up and down, while a 0.5 beta stock has been half as volatile. Stocks with negative betas have historically moved opposite to the S&P. 

Low Beta Improves Returns

I’ve recently done research using backtesting website Portfolio123 (www.portfolio123.com), that showed that confining your portfolio to low beta (below 1.0) stocks tends to improve the returns of a variety of different stock selection strategies.

With that in mind, I’m going to describe a traditional growth stock screen enhanced with a low-beta component. If you’re not familiar with the terms, growth stocks are those expected to grow earnings faster than the overall economy, and stock screens are programs available on financial websites that allow you to scan the entire market for stocks meeting your specific requirements.

Finding Low Beta - High Growth Stocks

Here’s how to use the free FINVIZ stock screener to set up the screen.

Select Screener from the FINVIZ home page (finfiz.com). FINVIZ’s screener uses filters that you use to identify stocks meeting your selection criteria. On the Filters menu, select “All” to see available filters. Then use the associated dropdown menus to select values for filters that you want to use.

Start by using analysts’ growth forecasts to pinpoint stocks with strong earnings growth expectations. Require “over 10%” for EPS Growth This Year and “over 15%” for EPS Growth Next Year.

You’ll always do best by limiting your list to profitable firms, so require “Over +5%” for Return on Equity, which is a widely used profitability measure.

Next, follow the smart money by requiring that institutions (mutual funds, large banks, etc.) already support the stock by holding large positions, and are still adding to those positions. Require “Over 40%” Institutional Ownership, which is the percentage of shares held by the big players and “Positive” for Institutional Transactions which means they have recently added to positions.

Since the lower the share price, the higher the risk, minimize risk by selecting “Over $15” for Price.

Finally, use the Beta filter and select “under 0.5,” which limits your list to the lowest beta stocks.

Five Low-Beta Growth Stocks

My screen turned up five stocks: soft drink bottler Coca-Cola Bottling (COKE), software maker Ellie Mae (ELLI), Home Street (HMST), a savings and loan, restaurant operator Popeyes Louisiana Kitchen (PLKI) and footwear maker Skechers U.S.A (SKX). Here's a link to the screen so you can see which stocks it's turning up today.

As always, consider the results of any screen to be research candidates, not a buy list. The more you know about your stocks, the better your returns. Plan on holding any stocks that you buy for at least six months.

8/23/16

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