An Unusual Combination: Low Volatility And Growth

by: Brad Kenagy

For this article, I will be looking for stocks within the theme of growth and low volatility, which at first glance are things that seem like they would be at opposite ends of the investment world. But I found there are stocks that have both characteristics. The reason why I chose to include low volatility as a theme is that I believe the market is due for a pullback, and if there is a pullback, low-volatility stocks tend to outperform. The reason I chose to include growth as a theme is that in the current market, growth stocks are being favored over value stocks.

Instead of using a stock screener, I will be using two ETFs -- a low-volatility ETF and a growth ETF -- to see which stocks are common to both. The low-volatility ETF I decided to use is the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA:SPLV), which is the largest and most popular low-volatility ETF. In addition to being the largest, I also chose SPLV because it holds only the 100 least-volatile stocks from the S&P 500. For my growth ETF selection, I used the Fidelity ETF screener to find a growth ETF that has a limited number of holdings focusing on growth and that has outperformed the S&P 500 (NYSEARCA:SPY) so far this year. I used the following screen criteria:

  • Number of Holdings: Less than 125
  • Capitalization Objective: Large cap
  • Style Objective: Growth
  • Performance YTD: >24.41% (SPY YTD performance 24.41%)
  • Assets: > $100 million

After running this screen, I found that two ETFs met the criteria: Guggenheim S&P 500 Pure Growth ETF (NYSEARCA:RPG) and the PowerShares Dynamic Large Cap Growth Portfolio ETF (NYSEARCA:PWB). I decided to go with RPG because it has more assets than PWB, and it has a higher performance than PWB. As far as holdings go, RPG has 112 holdings; I then compared those holdings to the 100 holdings of SPLV to see if any stocks were in both ETFs.


After comparing the holdings of each ETF, I found that five stocks were in both funds. The five stocks are Ball Corp. (NYSE:BLL), Cintas (NASDAQ:CTAS), Dr. Pepper Snapple Group, Inc. (NYSE:DPS), Stericycle, Inc. (NASDAQ:SRCL), and U.S. Bancorp (NYSE:USB). What's interesting about this group of stocks is that when thinking about low-volatility stocks, you think of stocks that are classified as consumer staples, utilities, or healthcare companies. However, out of these five stocks, only DPS is a consumer staples stock. The other four stocks are classified as materials, industrials, or financials. They tend to have higher growth, so it makes sense as to why they would be included in a growth ETF as well.


The next step I took was to see if each of these five stocks was undervalued or overvalued at current levels. To value each stock I will be using a DCF calculator, with data for earnings and growth coming from, benchmark data from, and CPI data from the BLS. I will using the following assumptions for the calculator, and the earnings and growth data I gathered from Zacks is in the table below, along with the results.

Calculator Assumptions

  • Earnings growth for the next five years
  • Level off to 1% after
  • Benchmark return: 10-year annualized SPY return of 7.86%+1.50% inflation = 9.36% benchmark

DCF Results


LT Growth

Est. Fair Value

Current Price
































After running the DCF calculator for each stock, I found that three of the five stocks were undervalued. DPS was slightly undervalued, and I would say it is fairly valued at current levels. However, with BLL and USB there is some significant upside potential because, according to my fair value estimate, BLL is undervalued by 13.79% and USB is undervalued by 29.43%.

Closing Thoughts

I believe Ball Corp. and U.S. Bancorp are worth a deeper look for two reasons. The first is that they are two of only five companies that passed my unique screening criteria of the opposing investment themes of low volatility and growth. The second reason they are worth a deeper look is that they are significantly undervalued at current levels.

Ball Corp.

While Ball Corp is not a household name or that well-known in the investment world, it has a presence in pretty much every household. Ball Corp., according to an investor presentation made earlier this year, is the world's largest producer of beverage cans. In addition, Ball Corp. also manufactures metal cans for canned food. Therefore, Ball Corp. is a quality play on increasing food and beverage consumption worldwide.

U.S. Bancorp

U.S. Bancorp is the fifth-largest bank in the United States behind the Big Four banks. What makes U.S. Bancorp worth a look is that it has a history of being a conservatively run bank when compared to other large banks. The saying "a picture is worth a 1,000 words" applies to U.S. Bancorp. The chart below is from a recent investor presentation and it shows financial-crisis-related resolution costs that U.S. Bancorp and competing banks have incurred. The chart clearly shows that U.S. Bancorp has had a minimal amount of resolution costs incurred over the last three years, which shows the conservative business practices have been beneficial for U.S. Bancorp.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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