Revealed – One of my top picks for risk-adjusted return

Vaseline2 weeks ago

0 5 minutes read

Revealed – One of my top picks for risk-adjusted return

I wanted to share a great question I received recently about the best risk-adjusted capital gain potential…

I usually get some really great questions from my subscribers. And last week, I received one that I think is very important and worth spending some time addressing today. Here is the question…

“Which publicly traded companies do you think have the best potential for risk-adjusted capital gains over the next three years?”

Now, two companies come to mind that fit…

But before I get into that, I want to use today’s 360 Square to explain what this subscriber is asking by describing what he means by asking about risk-adjusted capital gain potential. I’ll also show why it’s important to invest in stocks like this, and even highlight one of the companies that came to mind when I originally answered this question.

And I’ll wrap things up today by revealing where you can find other market winners before the rest of the crowd.

What is a “risk-adjusted” return?

Let me start by explaining what a risk-adjusted capital gain is…

First, a capital gain is just a fancy way of describing the return you earn on an asset. In our case, today, we are talking about a stock.

Now, when we talk about “risk-adjusted” capital gains, we’re essentially talking about the return you get for the risk you take.

And that’s why this is such a great question, folks, because a number of individual investors don’t consider this enough, period.

The fact is that there are several indicators that we can use to measure the performance of an investment in relation to the level of risk associated with it. For example, some of these tools compare different investments with different risk profiles, such as the broader market (the S&P 500, for example) or the “risk-free rate” on a 10-year US Treasury. These tools help investors understand whether the return they are getting is adequate enough for the level of risk they are taking.

I’m sure many of you are probably curious how I calculate risk, so let me explain.

First, you need to understand that a stock’s risk to me is not its “angle of climb” but its “dispersion from the mean” (ie standard deviation).

Second, we must remember that there is good “high volatility” and bad “low volatility,” similar to the cholesterol ratio where HDL is good and LDL is bad. This is what is called the up/down capture ratio.

And third, beta is the risk associated with the overall stock market; it is better known as “systemic risk”.

I consider all three of these factors—standard deviation, up/down capture ratio, and beta—when determining risk for Growing Investor Buy picks from the List.

When it comes to figuring out risk versus return, I just use a ratio based on alpha/standard deviation. In other words, I calculate which stocks have significantly better alpha (unsystematic return uncorrelated to a market benchmark) and beta (systematic return uncorrelated to a market benchmark).

Alpha + Beta times the market reference return = a stock’s total return

Now, I have time-tested systems that do these calculations. And the reality is that most investors can’t do that for themselves.

But the point is that you want to choose and invest in stocks that match your risk tolerance. So, for example, if you have a low risk tolerance, you don’t want to invest in a high-risk stock. And vice versa.

One of my top risk-adjusted picks

So when I answered this subscriber’s excellent question, I pointed him to one of my safest risk-adjusted growth stock picks: Eli Lilly and Company (LLY).

Eli Lilly is a well-known drug manufacturer that has developed more than 100 drugs in its 147-year history.

Most recently, the company has benefited from increased demand for its diabetes and weight loss treatments – Mounjaro and Zepbound. In fact, growing demand for these treatments led to a 36% increase in total revenue in its second quarter.

Eli Lilly is a great risk-adjusted pick because it’s a low-risk stock. But if you look at the chart below, you’ll see that this doesn’t necessarily mean that LLY won’t experience some volatility. However, which means LLY is less susceptible to wild market swings.

The reality is that you can’t expect a high-quality growth stock to always have smooth growth. But since we added LLY to us Growing Investor August 2023 shopping list, this stock pulled back quickly after each dip.

I should also point out that Eli Lilly’s 51% gain nearly tripled the S&P 500’s 20% gain for the year.

Looking at the numbers…

And if that doesn’t tell you enough, Eli Lilly also has strong fundamentals.

In August, the company reported second-quarter revenue of $11.3 billion, which beat estimates of $9.92 billion by 13.9 percent. Earnings, meanwhile, rose 86% year over year to $3.54 billion, or $3.92 per share. That was up from $1.9 billion, or $2.11 per share, in the second quarter of 2023. Analysts had expected earnings of $2.60 per share, so Eli Lilly posted a surprise of 50.8% on earnings.

Actually looking at me Stock grader instrument, LLY receives a fundamental grade of B and a quantitative grade of A, giving it an overall grade of A. (Subscription required).

Now, Eli Lilly is scheduled to report its third-quarter earnings on Wednesday, October 30 after the market closes.

The analyst community expects earnings per share to grow 4,380% year-over-year to $4.48 per share. Analysts also raised revenue estimates by 17.6% over the past three months. Revenue for the third quarter is expected to grow 28.52% year-over-year to $12.21 billion.

Looking ahead, Eli Lilly expects full-year 2024 revenue of $45.4 billion to $46.6 billion, an increase of $3.0 billion from the company’s previous guidance. This is much higher than current analyst estimates of $43.01 billion. Full-year earnings per share are expected to be between $16.10 and $16.60, which is well above current estimates of $13.76 per share.

All this to say, Lilly should continue to post impressive results for the foreseeable future.

Choosing market leaders ahead of the crowd

Bottom line, Eli Lilly is one of my top risk-adjusted growth picks for the next three years. But he is not the only one…

I shared the name of another top pick with me Growing Investor subscribe last friday. I recommended this stock Growing Investor subscribers since January of this year, and is currently growing by almost 30%. Due to the company’s superior fundamentals, I expect it to continue to thrive for years to come.

In the meantime, you should know that each of my Growing Investor Buy List recommendations are supported by superior fundamentals and strong buying pressure.

In fact, so far in September, my Buy List for High Growth Investments is up 2.4%. That compares with gains for the S&P 500, NASDAQ and Dow of 1.6%, 2.3% and 1.9%, respectively, over the same time. So, I expect me Growing Investor stocks continue to emerge as new market leaders and continue to thrive steadily.

To access this shopping list, with me at Growing Investor today.

(Already a Growing Investor subscriber? Click here to login to the members-only website now.)

Sincerely,

Louis Navellier

Editor, 360 Square

The Publisher hereby discloses that, as of the date of this e-mail, the Publisher owns, directly or indirectly, the following securities that are the subject of commentary, analysis, opinions, advice or recommendations in, or are otherwise referred to in, the essay presented above down:

Eli Lilly & Company (LLY)

Vaseline2 weeks ago

0 5 minutes read

Vaseline

Related Articles

What Happens to Dell Stock?

PTY: Makes a lot of sense here

Some investors continue to make this Ford mistake

Chip companies like Nvidia and Intel are grappling with a gender gap amid the AI ​​boom

Chip companies like Nvidia and Intel are grappling with a gender gap amid the AI boom