This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Low-Risk Stocks to Buy for 2012

Stocks in this article: UTHR ANV AAPL DTV HAS

MILLBURN, N.J. ( Stockpickr) -- My investment strategy seeks out stocks that are cheap relative to their growth rate -- referred to as growth at a reasonable price, or GARP. To that end, I seek out stocks that are selling at low price-earnings-to-growth, or PEG, ratios.

The price-to-earnings, or P/E, ratio is a measure of risk. It calculates the multiple of earnings an investor is willing to pay. The higher the multiple, the greater the stock price will react to changes in earnings per share. A stock sporting a lower multiple is considered safer because of the lesser impact that earnings has upon stock price. Lower-P/E stocks tend to compensate investors by paying dividends.

Back in May, I recommended four reasonably price stocks. Since that date, the S&P 500 is down over 5%. Of the four stocks, only one is down -- FedEd (FDX), which shed 9.2%. The rest have seen positive returns: Apple (AAPL) is up 15.1%, Ralph Lauren (RL) is up 9.6%, and Buffalo Wild Wings (BWLD) is up 6.4%.

>>7 Trades to Beat the Market in 2012

Another part of my strategy is to avoid stocks with high PEG ratios as those tend to be overpriced, be priced for perfection (that is, they leave no room for error) and invite too much risk into one's portfolio. In July, I recommended avoiding (or shorting) five stocks with high PEG ratios. With the S&P down about 4.5% since then, Amazon (AMZN) is down 8.6%, Fortinet (FTNT) is down about 11.1%, Dolby Labs (DLB) is down 20.7%, Salesforce (CRM) is down 21.3%, and SodaStream (SODA) is off 59.6%.

Now I'm taking my research one step further by combining PEG with beta. Beta is the sensitivity of a stock's price to that of the market portfolio. Most people use the S&P 500 as a proxy for the market portfolio.

Why use beta? Beta is a measure of market risk. I am concerned that the broad markets are stuck in an endless series of intertwined economic do-loops with a risk that they progress to a never-ending condition. A "do-loop" is a term used by computer programmers to describe repetitive tasks that are supposed to terminate upon a certain condition being satisfied. But a programming flaw could produce a never-ending do-loop that hangs the program up and could potentially cause a system crash.

Here are some of the seemingly endless economic do-loops that we're currently facing:

1. The Euro Debt Do-Loop: Every time we seem to arrive at a solution to the problems in the eurozone, we go back to the beginning. It started with Spain. Then it went to Greece. Then to Italy. Now back to Spain. Will it ever end?

2. The Technical Do-Loop: The S&P 500 is within a few points of where it stood on Aug. 31, Oct. 20 and just about a year ago. It seems that we have gone absolutely nowhere, in an endless market do-loop -- though we have traveled far and wide in the intervening periods between those dates. The only true winners have been the stock pickers who've been able to identify the right stocks and the brokers who have racked up huge commissions along the way.

3. The Capital Hill Do-Loop: We suffered through the period leading up to the extension of the debt ceiling on Aug. 2. Now we have to relive this with the painful negotiations of the Super Committee. How many people will worry about another credit downgrade of the U.S. once the Super Committee comes to an agreement?

4. The Daily Futures Do-Loop. U.S. index futures head lower after the U.S. market close, reverse into the evening, tank when Europe opens, rebound after the morning U.S. economic or earnings data is released, sell off into the European close -- and then comes the wild card, the U.S. close.

>>5 Cash-Rich, Low-P/E Stocks

So now, taking all of this into consideration, I am seeking companies with low risk relative to the overall markets that still exhibit reasonable prices relative to levels of earnings growth. I screened for stocks with raw beta of less than 1, PEG ratios of less than 1 and market capitalizations of more than $500 million. From the output, I ranked the stocks according to the sum of the raw beta plus the PEG ratio and analyzed each company from a fundamental perspective.

Let's take a closer look at five stocks that I consider excellent value opportunities as we look ahead to the next year.

1 of 6

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs