MILLBURN, N.J. (Stockpickr) -- In a perfect world, we would seek the maximum amount of return with the least amount of risk. In the real world, many might see that as a fool's errand. I believe, though, that we can put together a portfolio of stocks that will give us excellent potential return, at a cheap valuation with a minimum amount of risk.
With that in mind, I scanned for stocks that met two criteria. First, I sought out stocks with historical volatilities below that of the
over the course of the last year; the one-year realized or actual volatility for the S&P 500 is 23.25%. Second, I sought out stocks with PEG ratios that were below 1.3. I used 1.3 as a reasonable measure of good value. As you might know, stocks with a PEG of below 1 are extremely cheap, and those over 2 are too risky or overpriced.
From the resulting stocks, I eliminated those companies that I believed did not meet my normal fundamental criteria for an investment. What was left were
is one of the largest biotechnology companies in the world, sporting a market capitalization of around $56 billion. The company has many well-known products that treat a variety of diseases and conditions, including Arenesp, Embrel, Epogen, Neupogen and Neulasta.
The company, which was founded in 1980, does not have the same type of patent expiration risk that many of the ethical pharmaceutical companies such as
are facing. On top of that, Amgen has a fine pipeline of new products in various stages of testing and clinical trials.
Earnings are expected to grow 16% in 2012 and 11% in 2013, although that could change for the better if any new products are approved and launched. The stock sells at about 11.5 times current year's earnings. The one-year historical volatility is 21.5%
The average car on the roads in the U.S. stood at 10.8 years as of the end of 2011. While new-car sales are picking up and that average age of the consumer fleet may be headed lower, there is no doubt that there are a lot of old cars on the road. Consumers who are still repairing their balance sheets or struggling to make ends meet as gas prices are increasing are choosing to become do-it-yourselfers when it comes to auto repairs. Others may not prefer to do-it-yourself but seek out reputable national chains to perform minor repairs or oil changes.
That is why the auto parts store sector is booming. As it turns out, there are two companies in that sector that fit my criteria for low PEG low volatility investments.
. As of Dec. 31, 2011, the company operated 3,740 stores in 39 states. There is certainly room for O'Reilly to broaden its penetration into existing states and to expand to other states.
Earnings are expected to increase 22% in 2012 and 15% in 2013. The stock currently sells at 22 times current years' earnings estimates, implying a PEG of about 1.0. The one year historical volatility is 22.79%.
O'Reilly shows up on a list of the
The other stock in this theme is
, the auto repair and parts chain that
helped to turn around. Of course, as successful as he had been with AutoZone, he has failed with
, but linking those two companies may just be the next step. Sears Holdings is looking to monetize its Diehard brand of products and potentially its Sears Automotive business.
AutoZone is expected to grow earnings by 19% in 2012 and 16% in 2013. The stock currently sells at 17 times current year's earnings estimates making its PEG ratio very low. The one year historical volatility for AutoZone is 18.39%, which implies below market price stability for the stock.
As of the most recently reported quarter, AutoZone is also one of the
is one of the nation's largest supermarket chains, operating about 2,500 stores under the Kroger and other brand names. Furthermore, this Cincinnati-based company operates fuel centers, convenience stores, financial services and the mall-based Littman Jewelry chain. Taken together, Kroger is one of the world's largest retailing companies.
Make no mistakes, retailing is a hard enough business, supermarket retailing is even harder, but Kroger has mastered the management of supermarkets. Earrings are expected to rise 16% in 2012 and slow down to 7% in 2013, and the company has bettered analysts' estimates in each of the last four quarters by an average of 3 cents per quarter. The stock sells for only about 10 times current year's estimates. The one-year historical volatility for Kroger is 21.50%.
The balance sheet may not look all that swell on the surface, but once you dig down deep, the long-term debt of the company is primarily lease obligations. The company's liquidity is in good condition.
operates over 4,200 retail variety stores in the U.S. and Canada, featuring the sale of merchandise from food to household goods for $1. With the unemployment levels of this country remaining at elevated levels, Dollar Tree and its peer group have been in growth mode for several years. Many people who normally shop at normal-priced stores have also begun to shop at Dollar Tree. This whole sector has been the subject of takeovers and attempted takeover in the past few years.
Dollar Tree is expected to grow earnings by 22% in 2012 and 15% in 2013. Results have consistently bettered analysts' expectations in each of the last four quarters by an average of 3.5 cents or nearly 4%. The stock sells at 21 times current earnings and has traded with a one year historic volatility of 22.7%.
As of the most recently reported quarter, Dollar Tree was one of
-- Written by Scott Rothbort in Millburn, N.J.
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At the time of publication, Rothbort had no positions in stocks mentioned, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
, an educational social networking site; and, publisher of
. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
Fox Business Network
and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.