10 'low-risk' stocks for high returns

Share this
10 'low-risk' stocks for high returns

The old saying to 'sell in May and go away' is one of those stockmarket maxims that's largely tosh, but still has a shred of sense in it. The indefatigable tracker of equity anomalies, The Stock Market Almanac, stresses that May generally isn't a bad month for stocks.

But there's no doubt we're heading into the market's quieter half of the year. So as the beach beckons, more defensive-minded investors could perhaps consider which stocks are better placed to look after themselves.

When it comes to building an all-weather share portfolio, the general guidance is to balance exposure between cyclical and defensive sectors.

As we've seen recently, cyclical shares - in areas like retail and construction - can do very well when markets are upbeat. Meanwhile, defensive sectors like healthcare and utilities are seen as safe-havens during tougher economic periods. Defensives don't tend to do as well as cyclicals in the good times, but they don't generally fall as hard as cyclicals when the economy takes a dip.

But there is another way of thinking about this kind of diversification - and that's to consider the importance of price volatility. Very simply, volatility is a measure of how much a share price moves around over time. There are various ways of calculating it, but in essence it's a measure of risk. It's a guide to how much you're going to have to stomach a share price swinging up and down.

An easy way of thinking about volatility is to see it as a guide to how confident the market is in its valuation of a stock. With high volatility, the market is saying it's not entirely sure what the price should be. But with low volatility, the market is saying it's much more certain about how the stock should be priced.

Just like cyclical and defensive stocks, high and low volatility shares do better at different times. When the market is 'risk on', high volatility shares can perform exceptionally well. But over time, low volatility shares actually outperform - and that's what is known as the low volatility anomaly. To some it's surprising because it flies in the face of the traditional view that the higher the risk, the higher the return should be.

It's possible to plot degrees of volatility in a way we can all recognise: the spectrum ranges from Speculative to Adventurous to Balanced and finally to Conservative. Stockopedia research into the performance of UK stocks over the past three years, shows that portfolios of Conservative shares not only have smoother price trends but they outperform everything else.

With all this in mind, we've cut through the calculations to produce a list of the most Conservative (volatility) mid-and large-cap shares in the market. The table includes Style Classification to offer an idea of the kind of investment profile each share has.

Name Mkt Cap £m Forecast PE Ratio Risk Rating StockRank Style Sector
HSBC 133,308 14.4 Conservative Turnaround Financials
Unilever 115,159 22.0 Conservative High Flyer Consumer Defensives
British American Tobacco 98,999 18.5 Conservative High Flyer Consumer Defensives
Diageo 57,671 21.6 Conservative High Flyer Consumer Defensives
Vodafone 54,618 37.5 Conservative Turnaround Telecoms
Reckitt Benckiser 51,006 21.9 Conservative High Flyer Consumer Defensives
Relx 31,693 20.1 Conservative High Flyer Industrials
Compass 26,228 22.1 Conservative High Flyer Consumer Cyclicals
WPP 21,747 13.5 Conservative Contrarian Consumer Cyclicals
Smith & Nephew 11,385 20.1 Conservative High Flyer Healthcare

This kind of screening casts an interesting light on the market because it confirms some of the largest blue-chips as very low volatility stocks. Among the Turnarounds, which have appealing valuation and momentum features, the screen picks up HSBC (HSBA) and Vodafone (VOD).

The one Contrarian share here, which has appealing quality and valuation features, is WPP (WPP). Meanwhile, the High Flyers, which are high quality, high momentum shares, include the likes of Unilever (ULVR), British American Tobacco (BATS) and Diageo (DGE).

So, for those thinking about putting their feet up for the summer, any pre-holiday portfolio housekeeping could benefit from taking a look at stock price volatility. It's a useful risk management tool that can highlight areas of concern. Moreover, it can equip investors with much more knowledge about what to expect from shares in different parts of the market.


About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stock market investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

● Interactive Investor readers can enjoy a completely FREE 14-day trial of Stockopedia by clicking here.

It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.

*No fee for publication is involved between Interactive Investor and Stockopedia for this column.

About the author

Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook".

The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.