McDonalds, General Mills, and Other Low-Volatility Stocks Are Being Overlooked. It’s an Opportunity.

J.P. Morgan suggests not overlooking low-volatility stocks, such as McDonald’s. (David Paul Morris/Bloomberg)

Investors have been piling into some of the stock market’s riskiest, most volatile names. It could spell an opportunity for contrarian traders willing to bet on overlooked low-volatility stocks, those with consistent earnings and high margins.

After a brief case of jitters this spring, the market is once again favoring so-called high-beta stocks, those with bigger-than-average price swings. The Invesco S&P 500 High Beta exchange-traded fund has returned 16% so far this year—compared to 7.8% for the S&P 500 and just 5% for the Invesco S&P 500 Low Volatility ETF.

That may be a mistake, according to a note Monday by J.P. Morgan Global Markets Strategy. By betting so heavily on volatile stocks, the market seems to be assuming a “goldilocks” outcome for the U.S. economy, while disregarding the risks of additional trade tensions. Investors might be better off focusing on blue-chip names whose steady profits tend to help them weather downturns.

“The latest episode of extreme crowding is not in the high beta,” wrote strategist Dubravko Lakos-Bujas. “Low vol once again presents an attractive risk/reward.”

Which stocks fit the bill? Lakos-Bujas ran a screen of names with low price volatility, low earnings volatility, high net-income margin, and attractive dividend yields. The list includes plenty of well-known names in sectors such as financials, utilities, and consumer goods.

Fast-food names McDonald’s and Yum! Brands are both on Lakos-Bujas list. McDonald’s, which trades at 23 times forward earnings, is up just 2.6% so far this year. The chain has struggled as higher prices put pressure on working-class Americans’ budgets. Still, sales should get a boost from expanded operating hours and new beverage options later this year, according to UBS.

Other consumer companies include Coca-Cola , Mondelez International, and General Mills . General Mills, which makes grocery store staples such as Lucky Charms and Cheerios, is down about 22% this year amid weak demand and stiff competition from store brands. But the stock, which trades at just 15 times forward earnings, could benefit from a slew of new product launches in coming months.

Among financial firms, J.P. Morgan’s list includes CME Group, CBOE Holdings, Aflac, and Marsh & McLennan.

Utilities include Evergy, Southern Co., and Duke Energy.

Southern Co. has seen shares gain nearly 16% this year. Yet they still trade at just 21 times next year’s earnings, below the 22 times average for the S&P 500. The company, which recently opened two new nuclear reactors, stands to benefit from growing demand for nuclear energy.

Write to Ian Salisbury at ian.salisbury@barrons.com