I usually receive some really great questions from my subscribers. And last week, I received one that I think is very important and worth taking some time to address with you today. Here’s the question…
“What publicly traded companies do you consider to have the best risk-adjusted capital gain potential for the next three years?”
Now, I have two companies come to mind that fit the bill…
But before I get into that, I want to use today’s Market 360 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 these kinds of stocks, and I’ll even highlight one of the companies that came to mind when I originally answered this question.
And I will 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’re getting for the risk you’re taking.
And that is why this is such a great question, folks, because a log of individual investors don’t consider this enough, period.
The fact is there are several metrics we can use to measure the performance of an investment relative to the level of risk associated with it. For example, some of these tools compare different investments with varying risk profiles, like the broader market (the S&P 500, for example) or the “risk-free rate” of a 10-year U.S. Treasury. These tools help investors understand if the return they are receiving is adequate enough for the level of risk they are taking.
I’m sure many of you are probably curious as to how I calculate risk, so let me explain.
First, you must understand that a stock’s risk to me is not its “angle of ascent,” but its “dispersion from the mean” (i.e. standard deviation).
Second, we need to remember there is good “up volatility” and bad “down volatility,” similar to your cholesterol ratio where HDL is good and LDL is bad. That’s what is known as the up/down capture ratio.
And third, beta is the risk tied to 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 the risk for our Growth Investor Buy List picks.
When it comes to figuring out the risk vs. return, I merely use a ratio based on alpha/standard deviation. In other words, I calculate which stocks have significantly better alphas (unsystematic return uncorrelated to a market benchmark) and betas (systematic return uncorrelated to a market benchmark).
Alpha + Beta times the market benchmark return = a stock’s total return
Now, I have time-tested systems in place that do these calculations. And the reality is that most investors can’t do this for themselves.
But the point is that you want to be picking and investing in stocks that match your risk tolerance. So, for example, if you have a low-risk tolerance, you don’t want to be investing 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 stocks picks: Eli Lilly and Company (LLY).
Eli Lilly is a well-known drug manufacturer, developing more than 100 drugs in its more than 147-year history.
Most recently, the company has benefited from increased demand for its diabetes and weight-loss treatments – Mounjaro and Zepbound. In fact, surging demand for these treatments led to a 36% jump in total revenue in its second quarter.
Eli Lilly is a great risk-adjusted pick because it is a low-risk stock. But if you look at the chart below, you’ll see that this doesn’t necessarily mean LLY won’t experience some volatility. What it does mean, however, is that LLY is less susceptible to wild swings in the market.
The reality is you can’t expect a high-quality growth stock to always have a smooth ride up. But since adding LLY to our Growth Investor Buy List in August of 2023, this stock has snapped back quickly after every dip.
I should also point out that Eli Lilly’s 51% gain has 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.
Back in August, the company announced second-quarter revenue of $11.3 billion that topped estimates for $9.92 billion by 13.9%. Earnings, meanwhile, soared 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 expected earnings of $2.60 per share, so Eli Lilly posted a 50.8% earnings surprise.
In fact, looking at my Stock Grader tool, LLY receives a Fundamental Grade of B and a Quantitative Grade of A, giving it a Total Grade of A. (Subscription required.)
Now, Eli Lilly is slated to release its third-quarter earnings on Wednesday, October 30, after market close.
The analyst community expects earnings per share to surge a whopping 4,380% year-over-year to $4.48 per share. Analysts have also increased earnings estimates by 17.6% in the past three months. Third-quarter revenue is forecast to rise 28.52% year-over-year to $12.21 billion.
Looking ahead, Eli Lilly expects full-year 2024 revenue between $45.4 billion and $46.6 billion, which represents a $3.0 billion increase over the company’s previous guidance. That’s nicely higher than analysts’ current estimates of $43.01 billion. Full-year earnings per share are forecast to be between $16.10 and $16.60, which is well above current estimates of $13.76 per share.
All of this to say, Lilly should continue to post impressive results for the foreseeable future.
Picking The Market’s Leaders Ahead of the Crowd
Bottom line, Eli Lilly is one of my top risk-adjusted growth picks for the next three years. But it’s not the only one…
I shared the name of another Top Pick with my Growth Investor subscribers last Friday. I recommended this stock to my Growth Investor subscribers back in January of this year, and it is currently up nearly 30%. Thanks to the company’s superior fundamentals, I expect it to continue prospering in the years to come.
Meanwhile, you should know that each of my Growth Investor Buy List recommendations is backed by superior fundamentals and strong buying pressure.
In fact, so far in the month of September, my High-Growth Investments Buy List is up 2.4%. This compares to the S&P 500, NASDAQ and Dow’s rise of 1.6%, 2.3% and 1.9%, respectively, during the same time. So, I expect my Growth Investor stocks to continue to emerge as new market leaders and continue to steadily prosper.
To gain access to this Buy List, join me at Growth Investor today.
(Already a Growth Investor subscriber? Click here to log in to the members-only website now.)
Sincerely,
Louis Navellier
Editor, Market 360
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Eli Lilly & Company (LLY)
