3 Stocks to Consider in BlackRock’s Minimum Volatility Portfolio

Investing during a bear market is never easy as there is no clear indication of when the tides might turn. On the other hand, if you divest completely, you run the risk of selling low and buying high.

However, there is a hybrid solution that can be implemented called minimum volatility investing. The Minimum Volatility Investment Factor is a market segmentation approach that is not sensitive to economic cycles.

It is therefore a capital allocation strategy that generally provides low to moderate returns at each stage of the economic cycle.

The world renowned hedge fund BlackRock (noir) manages its iShares MSCI USA Min Vol Factor ETF (USMV), which includes 178 low-volatility holdings, and I’ve picked three that I’m bullish on.

Newmont Mining (NEM)

Newmont is a low beta precious metals miner. The stock’s low beta of 0.50 means it is less risky than the broader market. However, being a precious metals stock, Newmont exhibits cyclical attributes.

With commodity prices remaining relatively resilient, Newmont could likely be one of the outperformers for the foreseeable future, while delivering an astonishing 3.6% dividend yield.

Newmont operates mines around the world, with nine of its assets located in leading jurisdictions, representing 90% of its gold production. Additionally, Newmont produces lavish cash flow, with free cash flow of over $2.4 billion for the past 12 months.

The company is fortunate to have mines with an extraordinary lifespan that allow it to gradually reduce its costs. Newmont’s efficiency and pricing advantages are reflected in its gross profit margin of 39.8%.

Although Newmont’s price multiples are high, they still exhibit cyclical value. For example, the stock’s price/earnings ratio is trading at a 23.18% discount to its five-year average.

On Wall Street, Newmont earns a Consensus Hold rating based on two buy and 10 sell ratings given over the past three months. NEM’s average stock price target of $75.28 implies 26.1% upside potential.

PepsiCo (PEP)

Pepsi retails consumer staples, classifying it as a non-cyclical consumer stock. Defensive stocks tend to outperform the broader market during times of uncertainty because risk aversion plays a role in investment style.

The company’s latest earnings report reflects its countercyclical nature. Pepsi managed to reverse rising input costs in its prior fiscal quarter by beating earnings estimates by 6 cents a share. Pepsi’s organic sales increased 13.7% in the quarter, driven by a 22% increase in Latin America, an 18% increase in Africa and a 13% increase in North America.

Rapid increases in inflation around the world have eroded corporate profit margins. However, PepsiCo broke away from the pack, with a solid gross profit margin at 53.42%. Additionally, Pepsi’s net income per employee ($32,900 per employee) is robust, deflecting any debate that it is suffering from wage pressure like many other companies.

Additionally, Pepsi is offering an attractive dividend of $1.15 per share at a yield of 2.58%, which could tempt many investors to opt for the stock’s safer yields during these uncertain times.

On Wall Street, PepsiCo has a moderate buy consensus rating based on six buy, six hold, and one sell rating over the past three months. The average PEP share price target of $178.67 implies 5.7% upside potential.

Microsoft (MSFT)

Microsoft is slightly riskier than the other two stocks because its beta coefficient of 1.04 implies that it has excess risk in the overall market. Still, Microsoft’s beta is significantly lower than that of most tech stocks. Thus, it is considered a low volatility asset from an intra-sector perspective.

The secular growth outlook is intact for Microsoft. The company holds a substantial share of critical markets which are experiencing double-digit annual growth. For example, Microsoft has about 20% market share in cloud infrastructure and 48% market share in productivity and business processes.

Microsoft’s collective growth is amazing. The company’s five-year revenue CAGR (compound annual growth rate) of 16% significantly exceeds the annual GDP growth rate of the United States, implying that it is a company on an exponential growth trajectory.

Additionally, after falling more than 20% year-to-date, Microsoft has entered undervalued territory. The stock’s price-to-earnings ratio is 8.4% below its five-year average. Additionally, Microsoft’s PEG ratio of 0.89x means investors are pointing to the growth in the company’s earnings per share.

On Wall Street, Microsoft gets a Strong Buy consensus rating based on 26 buys and a Hold rating given over the past three months. The average MSFT stock price target of $352.57 implies an upside potential of 34.1%.

Final Thoughts: Minimum Volatility Stocks Can Help Protect Capital

Minimum volatility investing could be a good way to invest your capital during times of market uncertainty. You probably won’t be exposed to big declines and you’ll be sure not to miss anything if the market rallies.

The three stocks mentioned in the article offer “best-in-class” attributes and could rise, given their strong fundamentals.


Comments are closed.