Investments with high returns are attractive, but investments with high risk-adjusted returns are even more valuable. Although risk can be difficult to measure, investors often use volatility as a metric. With this approach, stocks with larger and more frequent price movements (both up and down) are considered riskier.
One way to measure a stock’s risk-adjusted returns is to subtract the risk-free rate from its returns over time. Then divide this result by its volatility over that period. Investors know this as the Sharpe ratio, which measures how much return an investment generates for each unit of risk involved.
One practical reason this is important is that a sharp stock move can cause investors to panic. This may cause them to sell despite the stock rising because they believe the next day could wipe out all the gains. However, stocks that rise with limited volatility make investors more optimistic about holding them.
Below, I’ll look at three S&P 500 stocks that have delivered some of the highest risk-adjusted returns over the past six months. I will use the 6-month US Treasury yield of 4.4% as my risk-free rate. All returns refer to the close of trading on December 2.
Palantir: Best Sharpe Ratio in S&P 500 Index
Palantir Technologies today
Palantir Technologies
(As of 12/02/2024 ET)
- 52 week range
- $15.66
▼
$67.88
- P/E ratio
- 331.97
- Target price
- $35.64
First of all, it’s Palantir. New York Stock Exchange: PLTR. While the stock’s volatility is much higher than most S&P 500 stocks, it makes up for it with how much it’s rising. The stock has delivered a total return of 206% over the past six months. That gives it the highest Sharpe ratio of any S&P 500 stock over that period, at 3.3. Palantir is perhaps the most popular large-cap stock in recent memory. Its artificial intelligence solutions are in great demand.
The company first became known through its collaboration with the US government, but has expanded its business to more companies through its artificial intelligence platform (AIP). Its U.S. commercial revenue grew quickly, rising 54% last quarter. This nicely complements the 40% growth in US government revenues. This helped the company beat sales and adjusted earnings per share (EPS) estimates in each quarter of 2024. The company’s shares rose 35% in the three days following its latest earnings report. Additionally, the stock has seen significant movement recently as the company expects to qualify for inclusion in the NASDAQ 100 Index.
Targa: gas company experiencing high demand
Targhee Resources Today
(As of 12/02/2024 ET)
- 52 week range
- $81.03
▼
$209.87
- Dividend yield
- 1.54%
- P/E ratio
- 35.18
- Target price
- $176.50
Targhee Resources New York Stock Exchange: TRGP has delivered a total return of 66% over the past six months, but has done so with moderate levels of volatility. This gave him a very high Sharpe ratio of 2.5. Targa is a mid-market energy company. Specializes in the collection, processing, transportation and storage of natural gas and liquefied natural gas. The company sees high demand for natural gas. Natural gas volumes in the Permian Basin rose 18% last quarter, and the company transported record levels of natural gas.
The company is also commissioning new plants and expanding old ones, which demonstrates the high demand for its products. It continues to invest in projects to expand its capacity. Potential revenue growth from new plants worries investors. The company also announced that it expects to significantly increase its dividend by 33% in 2025 compared to 2024. This provides confidence in the company’s financial position and shows its commitment to rewarding shareholders.
Fair Issac: Inventor of the FICO Score with Fantastic Risk-Adjusted Returns
Isaac’s Fair today
(As of 12/02/2024 ET)
- 52 week range
- $1099.74
▼
US$2402.51
- P/E ratio
- 114.04
- Target price
- US$1998.75
The last one is the beautiful Isaac New York Stock Exchange: FICO. This stock’s impressive return of 81%, combined with average levels of volatility, has allowed it to achieve a Sharpe ratio of 2.8 over the past six months. Fair Isaac is a data analytics company that became famous for creating the FICO Score. FICO Score is a credit score for individuals. This is a key factor that financial institutions consider when someone applies for a loan. This metric is used almost universally in economics, giving Fair Isaac a strong competitive advantage.
The company saw strong revenue growth in its performance segment, which grew 28% and 24% in the third and fourth quarters of the fiscal year, respectively. Adjusted earnings per share also rose an impressive 31% last quarter. Americans taking on record amounts of credit card debt has increased demand for the scoring company.
You might want to hear this before you consider Targa Resources.
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