Low volatility, low valuation is still the name of the game

by Michael Tarsala

Low volatility is still the name of the game at the Dividend and Income Plus model.

“Market risk is moderate right now, but I don’t see a big growth rally either, because the earnings and outlooks that I am seeing are not worthy of a rally,” manager Bill DeShurko said.

His latest portfolio move sticks with his strategy of looking for value-oriented stocks with betas lower than the stock market as a whole.

He purchased shares of closed-end investment company Prospect Capital (PSEC), which makes investments in private companies. It has a market beta of 0.79, meaning it trades at 79% the volatility of the S&P 500.

It’s now a top 5 position, accounting for about 9.4% of the Dividend and Income Plus investment model

A few things attracted DeShurko to the stock:

  •  Its 11% dividend yield.
  •  It trades at less than 10 times forward earnings.
  • He timed his purchase as the stock gapped lower on news that it was issuing new shares; his purchase was at $11.07 a share.

DeShurko still sees potential for an upside breakout for the U.S. stock market driven by additional Fed stimulus. He says the S&P 500 remains in a bullish channel, which is why he wants to stay about 90% invested right now – but almost entirely in defensive stocks.

If he is wrong, his losses may be limited by a portfolio investments that trade at low valuations, have low betas, and that continues to collect strong dividends.

Source: Stockcharts.com

In the case of Prospect, it also has volume support just below $10.50 a share which may provide some additional protection to any stock slide.

Until he feels there is much clearer upward path for the markets, DeShurko says he will continue to take advantage of investments that offer lower-than-average risks and stronger-than-average yields.