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 |
