Lower Volatility Stocks Moving In The Right Direction

By Cory Mitchell | January 03, 2012 AAA

2011 saw a lot of volatility, which is not always a welcome sight for investors. Average true range (ATR) is a technical analysis indicator that can be used to gauge volatility on a day-to-day (and intra-day) basis. When market overall is volatile, finding individual stocks that have a lower ATR reading means less volatility. The following four stocks have relatively low ATR readings, are showing a positive return over the last year and could still move higher. Given the nature of these stocks, their recent price has been more sedate so they are unlikely to explode higher, but can instead potentially provide steady gains without the massive see-saw moves many stocks saw this past year. To provide a baseline, the S&P 500 SPDR (NYSE:SPY) ETF, which represents the broader market, has a current ATR reading of 1.962, which given its current price of $125.50, means that from day-to-day the ETF will move about 1.56% of its value. Since SPY has moved almost nowhere over the last year, finding stocks with lower volatility and a higher return is a two-fold benefit. (For a quick refresher, check out Measure Volatility With Average True Range.)

ConAgra Foods (NYSE:CAG) is up 16.81% over the last year, and has a current ATR of 0.381. Based on the current price of $26.40, this means the stock has a slightly lower volatility than the overall market (1.44%). Yet, the stock has been moving well since August and made a recent 52-week high at $26.68. If the stock can continue to push through this resistance area, the stock is likely to continue to move higher. This price area was last seen in July before it declined to the year low at $22.20. Therefore, the stock is at a pivotal juncture. A move back through the 52-week high is a positive sign, and stops can be placed below $25 or $24 to provide more room. The stock is unlikely to explode higher, but with minimal resistance beyond the 52-week high, the stock could move toward $29 to $30. (For more, see Technical Analysis: Support & Resistance.)

Unilever (NYSE:UL) is up 8.02% over the last year, but the stock has been ranging and consolidating since September. This has made the stock slightly less volatile than the broader market, with an ATR reading of 0.479 and a current price of $33.52 (1.43%). The 52-week high is at $34.55 and has been an elusive level. The stock will ultimately need to climb above it in order to break out of the range. The stock has been moving in a choppy fashion though, which means an entry can likely be made at a lower price, providing a low risk to reward trade. As the stock continues to consolidate purchasing near $32 with a stop below $31.50 or $31 provides a low-risk trade for a potentially big reward if the stock does break higher. A break above the 52-week high provides an initial target of $38.50.

XCEL Energy (NYSE:XEL) has been moving aggressively higher since August, and the stock is up 17.32% over the last year. The ATR reading has been declining steadily since August; the level of 0.379 for the current price of $27.64 means on a day-to-day basis the stock is moving 1.37% - slightly less than the broader market. The stock recently moved well above the 50-day moving average, therefore a pullback may be in order. If a pullback occurs it is a potential buying opportunity near $26 (current 50-day moving average level). A stop can be placed below $25. If the trend higher continues, the stock is likely to target $30.

Verizon Communication (NYSE:VZ) has been moving higher recently and ATR has been steadily declining. With an ATR reading of 0.504 and a price of $40.12 the stock is less volatile than the broader market (1.26%). Up 10.13% over the last year, the stock recently made a new 52-week high after breaking above the March high. The rally could continue, although buying a pullback is likely a good option, as historically, the stock has witnessed pullbacks to support levels after strong run-ups. Buying between $38 and $36 with stops below $35 can provide a decent risk to reward if the uptrend continues. If the uptrend continues the next target is $42. A drop below $35 would nullify the current uptrend.

The Bottom Line
Average true range provides a gauge of volatility. These four stocks have provided better returns than the broader market, and are doing so with less volatility than the broader market as determined by ATR. Just because a stock is seeing a decline in volatility does not always mean it will continue, though; a change in trend or a surprise event can cause volatility to spike. By looking for low-risk entry points, investors and traders can take advantage of stocks that are trending and are showing less volatility than the average stock represented by the index. Investors often think that volatile stocks provide better returns, but this is not always the case - these four stocks have outperformed and are also less volatile. (For more, see Technical Analysis: Indicators And Oscillators.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

comments powered by Disqus
Related Analysis
  1. Fed Comments Should Spur Positivity - Ahead of Wall Street
    Stock Analysis

    Fed Comments Should Spur Positivity - Ahead of Wall Street

  2. A 30% Profit Opportunity From Europe's Latest Moves
    Investing

    A 30% Profit Opportunity From Europe's Latest Moves

  3. Tepid Market Waters Across the Globe - Ahead of Wall Street
    Stock Analysis

    Tepid Market Waters Across the Globe - Ahead of Wall Street

  4. Earnings Expectations For The Week Of September 15
    Stock Analysis

    Earnings Expectations For The Week Of September 15

  5. First Negative Week in a Month? - Ahead of Wall Street
    Stock Analysis

    First Negative Week in a Month? - Ahead of Wall Street

Trading Center