In times of market volatility stemming from global economic and sovereign debt uncertainties, FBR Capital Markets believes investors are faced with increasingly difficult decisions about how best to position their portfolios to maximize alpha while carefully balancing portfolio risk.
"With these simultaneous, and sometimes polarizing, goals in mind, we present a tailored group of ideas that specifically attempt to help investors navigate these turbulent waters," said David Hilal, Director of Research at FBR Capital Markets.
Hilal recognizes the wide diversity of investment strategies given one's return objectives, risk profile, and outlook for the economy and the market.
Hilal has identified four specific strategies that he believes span this spectrum. They include: (1) ideas with near-term catalysts, (2) ideas for when the "risk-on" trade becomes in favor again, (3) ideas that are particularly attractive with an overlay or alternative derivative strategy to hedge risk, and (4) pair trade ideas.
"We believe Portfolios 1, 3, and 4 represent high-quality ideas that should outperform in the current market environment, while Portfolio 2 represents a list of names that will produce outsized returns when the risk-on trade becomes en-vogue once again," said Hilal.
-- Portfolio 1 - Near-term catalyst-driven ideas: Hilal believes stocks with nearer-term catalysts should hold up better than those without catalysts in the current volatility storm and outperform on positive news events. As such, this portfolio is comprised of stocks that have upcoming catalysts that he believes will drive their share prices higher if the outcomes he expects materialize.
-- Portfolio 2 - Ideas for when the “risk-on” trade returns: While it is unclear when investors' appetite for risk increases again, this portfolio represents the list of stocks Hilal believes will outperform when investors seek a more offensive strategy.
-- Portfolio 3 - Alternative investment strategies incorporating derivatives: In the current environment, hedging risk with the use of derivatives may be appropriate for some investors. Ideas in this portfolio offer alternative ways to invest in the same equity theme strictly with the use of derivatives or via an overlay strategy, Hilal said.
-- Portfolio 4 - Pair trades: Hilal said similar to Portfolio 3, this portfolio attempts to mitigate market and industry risk by presenting stock ideas as pair trades.