By Numer de Guia, CFA Investors are constantly trying to assess which stocks carry the greatest upside potential. We at Standard & Poor's have developed an entire system -- our STARS rankings -- aimed in part at determining which stocks among those covered by our analysts have the greatest potential for capital gains in the months ahead.
But what about the flip side? After all, investors may wish to consider what can happen on the other side of the ledger, too. To wit: Which stocks appear to display the lowest downside potential? In this week's screen, we decided to find those stocks that performed the best -- i.e., lost the least -- during periods of decline. Stocks which display the least amount of volatility during periods of losses may offer investors a greater degree of comfort during periods of market uncertainty.
PICK OF THE CROP. One way to measure that is through a statistic known as downside deviation, which represents the monthly volatility of a stock in periods of losses. Think of it as a stress test for stocks. Unlike
standard deviation, which examines a stock's performance in terms of both gains and losses, it considers only returns that fall below a threshold or minimum acceptable rate -- for our purposes, zero.
On to this week's screen. We started with the list of those stocks ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P equity analysts -- indicating that they are expected to outperform the overall market over the next six to 12 months.
Then we applied the stress test. We looked for those issues with a downside deviation -- derived from monthly returns over the 60-month period through February, 2005 -- below the downside deviation of the S&P 500 index of 3.36%.
The following 25 stocks emerged. The downside deviations computed for this list range from 2.27% to 3.05%.
HIGH STARS, LOW DOWNSIDE DEVIATION
Acadia Realty Trust
Alexandria Real Estate Equities
Arch Capital Group
Colonial Properties Trust
McCormick & Co.
Pan Pacific Retail
United Parcel Service
Wrigley (Wm.) Jr. Co.
De Guia is an analyst for Standard & Poor's Portfolio Advisors