What are we looking for?
The investment industry, with some exceptions, has rarely been ahead of the curve. Products are developed based on the rear view mirror approach, and seldom looking out the windshield. The current rash of low volatility ETFs is a perfect example.
The level of the Dow Jones industrial average, at this writing, is 13,172.76, but the cumulative ups and downs in 2011 was over 28,000 points. That volatility was actually 35 per cent less than in 2008, the year of the market meltdown.
Low volatility ETFs have outperformed in down markets, as you’d expect, but the trade-off is that these ETFs won’t capture as much of the upside in big rallies. In addition, this sudden interest in low volatility strategies may harbinger lower risk adjusted returns going forward.
Today’s screen will appeal to those who want low volatility stocks that are also showing strong bullish momentum and earnings growth, which aim to capitalize on the continuance of existing market trends.
Associate portfolio manager Sean Pugliese and I looked at Canadian companies with over $1-billion in market capitalization. We then isolated those with positive price changes over the past 30 and 90 days. We refined the list even further to include only companies where analysts’ consensus earnings estimates are positive for the next 12 months.
From those 33 companies, we found eight low beta stocks that are currently held in the Canadian low volatility ETFs. Beta is a measure of a stock’s volatility in relation to the market.
What we found?
The eight companies are shown with an asterisk. Low volatility ETFs should not take over your portfolio as the approach may produce an abnormal asset composition. Low volatility investing is not suitable for broad market exposure, and reduced volatility comes at a price – lower returns over the long run.
Low volatility stocks with bullish momentum and earnings growth
|Name||Symbol||Recent share price $||% price chg. (30 days)|
|Alimen Couche-Tard B*||ATD.B-T||49.08||10.6|
|Peyto Expl. & Dev.||PEY-T||21.28||8.96|
|Davis & Henderson||DH-T||19.32||13.38|
Source: Wickham Investment Counsel Inc.
|Name||Symbol||Recent share price $||% price chg. (30 days)||% price chg. (90 days)||% EPS est. (12 month)||Mark cap. ($ bil.)|
|Alimen Couche-Tard B*||ATD.B-T||49.08||10.6||47.15||0.18||9.33|
|Peyto Expl. & Dev.||PEY-T||21.28||8.96||44.17||1.06||2.95|
|Davis & Henderson||DH-T||19.32||13.38||6.68||0.46||1.14|
|Brookfield Cda. Office||BOX.UN-T||28.74||3.94||14.27||8.54||2.85|
|Allied Prop REIT||AP.UN-T||29.94||2.96||15.42||0.23||1.79|
|Mullen Group Ltd.||MTL-T||23.24||2.7||15.22||0.8||1.88|
|Arc Resources Ltd.||AET-T||23.1||0.74||18.77||0.18||6.73|
|First Cap Realty||FOR-T||18.97||3.1||7.78||6.28||3.48|
|Atco Ltd.-Class I*||ACO.X-T||75.59||3.62||9.16||0.01||4.35|
|First Majestic S||FR-T||16.49||4.17||6.32||0.13||1.9|