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