Combat a Coming Correction With Low Volatility Leaders

by Johnson Research Group | May 22, 2013 7:30 am

Despite growing pessimism, the market continues to take indices to new highs. The constant drip higher has a growing number of sidelined investors looking for a way to get their cash to work without feeling they’re setting themselves up to buy on the highs and sell on the lows.

One strategy that allows these investors to feel a little more comfortable with putting money in the game at these levels is to target lower volatility stocks within leading indices. The idea is simple: Lower volatility performers may be less likely to see deeper pullbacks when a correction does occur.

With this in mind, the table below identifies the ten lowest volatility stocks in the Nasdaq-100. This index represents the largest domestic and international non-financial securities listed on the Nasdaq based on market capitalization.

The table below displays data on the ten lower volatility stocks within the Nasdaq-100, using their current 100-day historical volatility as a gauge.

Right out of the gate there are three stocks that standout as strong bullish candidates for this approach. Let’s take a closer look at them.

Fiserv

Click to EnlargeFirst up: Fiserv (FISV[1]). Think of this company as one of the backbones for electronic payment systems. The company has been easily outpacing the market over the last three months, but has softened-up a bit more recently, indicating that a buying opportunity may be presenting itself before its next surge.

Fundamentally, the company has performed well on the earnings front as electronic payments continue to expand — no surprise. What is a surprise is that almost 70% of the analysts ranking the stock have it assessed as a “hold.” Watch this stock move higher as these analysts get off of the fence with some upgrades.

Paychex

Click to EnlargeAnother low volatility leader of interest is Paychex (PAYX[2]). The payroll processor continues to see some brighter days ahead as the employment situation improves. This stock is up almost 16% over the last three months compared to the S&P 500 performance of a stunning 11%, but the analysts still aren’t buying as 76% of them have it ranked a “hold.”

Another stunner is the fact that the shares are extremely heavily shorted to the tune of 9 times the shares’s average daily volume. We love the underloved outperformers, and Paychex is a strong contender in that category. Heck, its low volatility feature is just a bonus.

PowerShares S&P 500 Low Volatility Portfolio

Click to EnlargeDon’t like any of the stocks in the table? Well, try a low volatility ETF. Low volatility ETFs such as the PowerShares S&P 500 Low Volatility Portfolio (SPLV[3]) and the iShares MSCI USA Minimum Volatility Index Fund (USMV[4]) offer an easy way to diversify a portfolio into lower-volatility companies.

While we believe that the stocks identified will have more upside potential as a result of their specific situations, the slow-and-low volatility trend of these ETFs is attractive for almost anyone’s portfolio.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/05/combat-a-coming-correction-with-low-volatility-leaders/

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