It’s been months since the markets started to incessantly talk and hear about inflation, rate hikes, recession, layoffs and whatnot. In this backdrop, investors’ appetite for risk has declined and they are on the lookout for stocks that offer low risk and still beat the market. Interestingly, there are many studies which show that low volatile and low risk stocks can actually beat the market.
Investing in "Steady Eddies"
A research report by AllianceBernstein takes a look at an investment strategy that focuses on investing in low volatile stocks. The report calls these stocks “Steady Eddies” and says that an active investing approach which focuses on low volatility and strong fundamentals actually end up beating the market and performs better than passive investing approach that only takes in low volatility into account.
The report says that the outperformance of these low-risk stocks defy the basic rule of finance which says that with more risks come more chances of returns while limiting risks decreases the chances of higher returns. An interesting part of the report says:
“The low-volatility effect is as robust as more prominent anomalies found in low-valuation, small-capitalization and high price momentum stocks. Since 1973, the least volatile quintile of global stocks delivered returns that were one-third higher than the market, 20% less volatility. This performance generated a more than 50% higher Sharpe ratio—or absolute return relative to risk.”
The report also calculates the average returns of two hypothetical stocks: a stock with high volatility and a stock with low volatility. The low volatile investment outperforms the high volatility stock. Why? The report says it’s because of the compounding effects of the “ups and downs on actual investment earnings.” Volatile stocks simply lose a lot during market downturns and they have to work a lot to first recoup their losses and then begin their journey towards gains before hitting another market crash.
This research is highly relevant to the market situation investors are grappling with today. A beginner investor with a limited budget could do much better by putting money into low risk stocks than trying their luck with highly volatile stocks with apparently high growth potential. In this backdrop we decided to discuss some stocks in this article which apparently have low risk but higher growth.
For this article we first used a stock screener to identify stocks with high EPS and sales growth over the past five years and beta value less than 1. A beta value of less than 1 shows low volatility. From these checks we got a long list of stocks, from which we narrowed down to 14 stocks with the highest number of hedge fund investors. This way, the stocks mentioned in this article are some of the best low risk high growth stocks to buy now according to smart money investors.
Cloud security and software company Zscaler, Inc. (NASDAQ:ZS) has seen its shares grow by about 30% year to date through August 11. As of the end of the first quarter of 2023, 38 hedge funds in Insider Monkey’s database reported owning stakes in Zscaler, Inc. (NASDAQ:ZS). The biggest hedge fund stakeholder of Zscaler, Inc. (NASDAQ:ZS) was John Overdeck and David Siegel’s Two Sigma Advisors which had a $123 million stake in the company.
BTIG recently upgraded Zscaler, Inc. (NASDAQ:ZS) to Buy from Neutral. Zscaler, Inc. (NASDAQ:ZS)’s analyst Gray Powell set a price target of $185.
Artisan Global Discovery Fund made the following comment about Zscaler, Inc. (NASDAQ:ZS) in its Q4 2022 investor letter:
“Zscaler, Inc. (NASDAQ:ZS) provides cloud-based Internet security solutions. In the quarter, it announced 54% revenue growth and expected growth of nearly 40% in 2023 (ahead of expectations). Despite solid fundamental momentum, shares have underperformed this year as investors have grown concerned about slowing demand for enterprise software as the broader global economy slows. We believe the dual trends of rising security vulnerability and increased enterprise digitization will lead to sustained demand, even in a recession. Cybersecurity remains a top concern for businesses and governments alike as cyberattacks can have devastating financial and reputational consequences. Meanwhile, managing the security needs of legacy on-premise applications, a growing number of cloud-based applications (Office 365, Salesforce, etc.) and a more remote workforce (versus pre-pandemic) make operating IT infrastructures increasingly complex. Give the attractive long-term outlook and depressed valuations, we added to the position.”
Chinese real estate services company KE Holdings Inc. (NYSE:BEKE) – ADR shares have gained about 9% year to date.
In May KE Holdings Inc. (NYSE:BEKE) posted Q1 results. Adjusted EPADS in the quarter came in at $0.43, beating estimates by $0.18. Revenue in the quarter jumped 61.6% year over year to $295 billion, surpassing estimates by $410 million.
Out of the 943 hedge funds in Insider Monkey’s database, 39 hedge funds were long KE Holdings Inc. (NYSE:BEKE). The most significant stakeholder of KE Holdings Inc. (NYSE:BEKE) during this period wa s
Artisan Developing World Fund made the following comment about KE Holdings Inc. (NYSE:BEKE) in its second quarter 2023 investor letter:
“Bottom contributors to performance for the quarter included real estate platform KE Holdings Inc. (NYSE:BEKE). Beike fell due to weaker industry property sales in China in April following the release of strong pent-up demand in Q1, despite accelerating revenue and very modest cost growth.”
Internet and data center services Equinix, Inc. (NASDAQ:EQIX) ranks 12th in our list of the best low risk high growth stocks to buy now. Equinix, Inc. (NASDAQ:EQIX) has already gained about 16% year to date through August 11. Equinix, Inc. (NASDAQ:EQIX) recently announced a $42 million investment in India.
As of the end of the first quarter of 2023, 39 hedge funds in Insider Monkey’s database were long Equinix, Inc. (NASDAQ:EQIX). The most significant hedge fund stakeholder of Equinix, Inc. (NASDAQ:EQIX) was Ian Simm’s Impax Asset Management which owns a $461 million stake in the company.
Baron Real Estate Fund made the following comment about Equinix, Inc. (NASDAQ:EQIX) in its second quarter 2023 investor letter:
“We recently increased the Fund’s exposure to data center REITs by acquiring additional shares in Equinix, Inc. (NASDAQ:EQIX) and re-initiating a position in Digital Realty Trust, Inc.
Atlassian Corp ranks 10tht in our list of the best low risk high growth stocks to buy now. Earlier in August, Atlassian Corporation (NASDAQ:TEAM) posted strong fiscal Q4 results, beating the Street’s estimates on both EPS and revenue. Atlassian Corporation (NASDAQ:TEAM)’s revenue in the quarter jumped about 24% on a YoY basis. After the results several analysts upgraded Atlassian Corporation (NASDAQ:TEAM) and gave positive comments about the company. William Blair analyst Arjun Bhatia, who has an Outperform rating on Atlassian Corporation (NASDAQ:TEAM), said that the company results were helped by "strong demand" in the enterprise and "robust" migration to the cloud and data center.
A total of 39 hedge funds tracked by Insider Monkey reported owning stakes in Atlassian Corporation (NASDAQ:TEAM).
Artisan Partners made the following comment about Atlassian Corporation (NASDAQ:TEAM) in its Q4 2022 investor letter:
“Among our bottom contributors were Atlassian Corporation (NASDAQ:TEAM), SVB Financial Group and Catalent. The tougher macro environment caught up with Atlassian in the quarter as the company is seeing slower software user additions as customers of all sizes moderate hiring and spending. However, the company still expects to grow sales at a mid-20s rate in Q4 and grow its strategically important cloud revenues 40%–45%. These are slower rates than we expected, and could slow further, but Atlassian’s growth metrics remain solid in light of the environment. In the short term, slower revenue growth will likely pressure margins and profitability given the company’s rapid hiring expansion in recent periods. But we detect a meaningful shift in tone from management on expense growth and margins now that top-line growth is slowing. While we fully expect Atlassian to keep investing in its large growth opportunities, we think a prudent reprioritization of this spending will lead to margin tailwinds in the medium term. We are sensitive to the slowing near-term growth dynamics but believe remaining invested is appropriate given the longer term profit growth potential.”
Cloud software company Five9, Inc. (NASDAQ:FIVN) ranks 10th in our list of the best low risk high growth stocks to buy now. A total of 41 hedge funds out of the 943 funds reported owning stakes in Five9, Inc. (NASDAQ:FIVN). The most significant stakeholder of Five9, Inc. (NASDAQ:FIVN) was Daniel Patrick Gibson’s Sylebra Capital Management which owns a $186 million stake in the company.
Wasatch U.S. Select Strategy made the following comment about Five9, Inc. (NASDAQ:FIVN) in its Q4 2022 investor letter:
“Five9, Inc. (NASDAQ:FIVN) was another detractor. The stock was down after the company announced that the CEO had resigned to lead a new company. While we appreciated the outgoing CEO’s leadership, we believe there’s still a lot to like about the company. Five9 offers cloud-based software for contact centers, including customer-relationship-management integrations that include real-time (and historical) reporting, recording and quality monitoring. We believe there’s a long runway of growth for the company, as the contact center becomes the key point of customer engagement in a “remote” world, and as companies seek to move their contact-center records and operations to the cloud. We believe the CEO taking the reins, who is Five9’s chairman and former CEO, can help the company continue to carry out its strategic growth initiatives.”
California-based biopharmaceutical company Neurocrine Biosciences, Inc. (NASDAQ:NBIX) ranks 9th in our list of the best low risk high growth stocks to buy now. As of the end of the first quarter of 2023, 43 hedge funds out of the 943 funds reported owning stakes in Neurocrine Biosciences, Inc. (NASDAQ:NBIX).
Neurocrine Biosciences, Inc. (NASDAQ:NBIX) recently posted Q2 results. Adjusted EPS in the quarter came in at $1.25 beating estimates by $0.13. Revenue in the quarter jumped about 20% year over year.
HL Global Small Companies Equity Strategy made the following comment about Neurocrine Biosciences, Inc. (NASDAQ:NBIX) in its first quarter 2023 investor letter:
“We underperformed in Health Care, in which Neurocrine Biosciences, Inc. (NASDAQ:NBIX) was our biggest relative detractor. The drugmaker’s quarterly results failed to impress the market even as the outlook for its Ingrezza product-the only treatment for tardive dyskinesia, a nervous-system disorder resulting from psychiatric medicines-remains solid.”
Financial services company Interactive Brokers Group, Inc. (NASDAQ:IBKR) ranks 8th in our list of the best low risk high growth stocks to buy now. Interactive Brokers Group, Inc. (NASDAQ:IBKR) recently jumped after the company reported strong daily average revenue trades (DARTs) for July.
As of the end of the first quarter of 2023, 44 hedge funds out of the 943 funds reported owning stakes in Interactive Brokers Group, Inc. (NASDAQ:IBKR). The biggest stakeholder of the company during this period was William B. Gray’s Orbis Investment Management which owns a $591 million stake in Brokers Group, Inc. (NASDAQ:IBKR).
LVS Advisory made the following comment about Interactive Brokers Group, Inc. (NASDAQ:IBKR) in its second quarter 2023 investor letter:
“We also modestly added to our position in Interactive Brokers Group, Inc. (NASDAQ:IBKR) in the mid-$70s. We initiated our Interactive Brokers position last summer and published a write-up in September 2022. Interactive Brokers continues to trade at a discounted multiple as investors are skeptical that the company will continue to sustain the current level of net interest income beyond the near future. However, recent reports showing strength in the US economy and labor market suggest that interest rates won’t be cut in the near term. The company publishes monthly KPI metrics and investors appear to be ignoring recent strength in trading volume and margin loans. The current market environment of rising stock prices and elevated interest rates is a goldilocks environment for the company. With this last buy, we have now reached our limit of investing 10% of our portfolio at cost in the stock and can no longer increase the holding size.”
Lantheus Holdings, Inc. (NASDAQ:LNTH) shares have gained about 46% year to date through August 11. As of the end of the first quarter of 2023, 46 hedge funds in Insider Monkey’s database of 943 hedge funds were long Lantheus Holdings, Inc. (NASDAQ:LNTH). The biggest stakeholder of Lantheus Holdings, Inc. (NASDAQ:LNTH) was Paul Marshall and Ian Wace’s Marshall Wace LLP which owns a $90 million stake in the company.
Lantheus Holdings, Inc. (NASDAQ:LNTH) recently posted Q2 results. Adjusted EPS in the quarter came in at $1.54 beating estimates by $0.23. Revenue in the quarter jumped about 44% on a year over year basis.
LPL Financial Holdings Inc. (NASDAQ:LPLA) shares have gained about 4.5% year to date.
In July, LPL Financial Holdings Inc. (NASDAQ:LPLA) posted Q2 results. Adjusted EPS in the period came in at $3.94 beating estimates by $0.06. Revenue in the quarter jumped about 21.1% year over year to $2.47 billion, beating estimates by $30 million.
As of the end of the first quarter of 2023, 52 hedge funds out of the 943 hedge funds in Insider Monkey’s database held stakes in LPL Financial Holdings Inc. (NASDAQ:LPLA). The biggest stakeholder of LPL Financial Holdings Inc. (NASDAQ:LPLA) was Tom Gayner’s Markel Gayner Asset Management which owns a $28 million stake in the company.
Baron FinTech Fund made the following comment about LPL Financial Holdings Inc. (NASDAQ:LPLA) in its Q1 2023 investor letter:
“LPL Financial Holdings Inc. (NASDAQ:LPLA) is the largest independent broker-dealer in the U.S. Following a strong run in 2022, the stock detracted in the quarter. The weakness was largely driven by turmoil in the banking industry after the failure of SVB, which caused investors to sour on financial stocks in general. We believe LPL is immune from most of the issues facing banks. LPL is not a bank itself, has a relatively small balance sheet, and has a low-risk, short-duration securities portfolio. The banking crisis has caused investors to take a more dovish view on the path of interest rates, which is a headwind to LPL’s earnings as the economics on a large portion of client cash is tied to floating rates. However, we believe the company has an attractive growth profile even in a lower interest rate environment.”
