On the stock market, boring is not necessarily a swear word. Whilst investors frequently look for the next AI star, biotech high-flyers or turnaround candidates, it is actually those stocks that have been plodding along relatively unspectacularly over a long period of time that can be appealing. That is particularly true when it comes to products that optimise returns, because the more predictably an underlying has historically moved within a limited trading range, the more attractive it can be for barrier strategies. This is precisely where the idea of “boring stocks” comes into its own. The concept also fits in well with the current market phase: despite significant sell-offs on the bond markets, equities are proving astonishingly robust. At the same time, at the start of October the yield on ten-year US government bonds rose to its highest level since 2002. High interest rates, geopolitical uncertainty and persistently high share valuations suggest that – alongside the prospect of price gains – it may be time to place greater emphasis on stability once again.
In order to turn “boring” into a useful strategy, the equity universe of the S&P 100 was scrutinised, the critical factor being the historic high-low range of the last 24 months. The difference between the highest and the lowest share price is divided by the current price. To give an example, a share which had been trading at between USD 80 and USD 120 over the last two years, and now stands at over USD 100, gives a range of 40%. The principle is that the smaller the figure, the more “boring” the stock. It is important to bear in mind that the key ratio is not a classic measure of volatility. It indicates neither how frequently nor how rapidly the price has fluctuated between its highs and lows. Rather, it shows just how wide the overall historical range is in relation to today’s price.
The screening process brought ten known names to light. At 19.3%, Berkshire Hathaway has the smallest historical range. It is followed by Mastercard at 22.7%, Southern Company at 22.8%, Duke Energy at 24.5% and Costco at 26.7%. Also making it into the selection are Procter & Gamble at 28.6%, Verizon at 28.9%, Pfizer at 30.4%, Visa at 31.3% and Linde at 33.5%. The thinking behind it is entirely logical for barrier strategies: a historically narrower price range can suggest that a barrier lying well below the opening price is less likely to come within reach. In addition, more subdued price movements can limit the fluctuations of the structured product in the secondary market. Caution is required, however: historic price patterns are no guarantee for the future and a stock that seems boring can break out of its previous range at any time.
The actual art therefore only begins after the screening process. For worst-of products, it is not sufficient just to throw the dullest stocks together. The coupon rate, implied volatility, dividends and, in particular, the correlation between the stocks all influence the terms. In principle, for instance, multi-structures with a lower correlation enable more attractive terms. Taking all factors into consideration, the universe of ten was divided into three different baskets. For the trio of Mastercard, Pfizer and Verizon, for example, the combination was optimised to deliver the highest possible return, all other things being equal. Historically all three stocks move within relatively limited ranges and also had a six-monthly implied volatility of around 25%. The second part of this exciting investment theme provides an exact overview of the companies and the corresponding products.
Source: Refinitiv Past performance is not a reliable indicator of future performance.