Looking for low-risk stocks – with high expectations

What are we looking for?

Canadian stocks that let you sleep at night, but have a good chance of producing strong returns.

The background

Craig McGee, senior consultant at Morningstar Canada, has been looking at this past quarter's winners and losers.

He was struck by the degree to which riskier stocks have been rewarded in recent months.

Stocks with high "beta" scores, for instance have done very well.

(A high beta indicates a stock is more volatile than the general market, while a low beta indicates it is steadier than average.)

The high-beta half of the TSX composite index enjoyed an average total return of 16 per cent from July 1 to Sept. 30, while the low beta half advanced only 4.2 per cent.

It's unusual for risk to pay off so dramatically.

Mr. McGee looked at how an investor would have fared if she had constructed a portfolio of the 20 highest beta stocks in the TSX composite and updated the portfolio every quarter since 1990.

He found that this risk-loving strategy would have produced an annualized return of minus 3.7 per cent.

He then ran an alternative strategy that picked the 20 stocks with the lowest betas, while only selecting those that had positive consensus estimate revisions and flat or positive earnings surprises.

This strategy resulted in an annualized return of 17.5 per cent since 1990 – a much better result with much lower risk.

Our table today shows the current list of 20 low beta stocks with positive estimate revisions and earnings surprises.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia.

Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers.

CPMS data cover more than 95 per cent of the investable North American stock market.