Chicago, IL – September 8, 2009- Kevin Matras looks at how to maximize your returns with high beta stocks. Highlighted stocks in this week’s article include Expedia, Inc. (NASDAQ: EXPE), Masco Corp. (NYSE: MAS), Neenah Paper, Inc. (NYSE: NP), NBTY, Inc. (NYSE: NTY) and Whirlpool Corp. (NYSE: WHR). Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=5528.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
Previously in these articles, I’ve written on how a lot of people typically like to look for low beta stocks or lower volatility stocks.
But this week I want to focus on higher beta stocks.
What is Beta?
First and foremost, ‘beta’ is a measure of an asset’s risk relative to the ‘market’ (usually the S&P 500). (It’s typically calculated as the ‘performance a stock has experienced in the last 5 years as the S&P has moved up and down’.)
A beta of 1 means the stock’s relative volatility is equal to that of the market. Therefore, a beta that’s greater than 1 is more volatile than the market and a beta of less than 1 is less volatile. (It can also be explained as its excess movement or ‘return’.)
For instance, a beta of 1.5 will have 1 1/2 times the market’s movement (50% more movement than the market). But if the market is plummeting, more than likely you’re dropping even more than the market.
Of course, if the market is going up, these stocks should be going up 1 1/2 times (or 50% more) than the market.
Test Results
Let’s take a look at some statistics.
I ran several tests on the Research Wizard. The first ones I did were for stocks with betas half as much as the market, and the other with betas 50% more than the market.
The results of this test didn’t really surprise me that much, since the high beta stocks moved more than the market and the low beta stocks moved less than the market. But the high beta stocks didn’t lose 50% more than the market and the low beta stocks didn’t lose 50% less. But there was some interesting stuff.
The high beta stocks, using a 1-week rebalancing method between 1/4/08 and 3/6/09 (the low of the market), lost -59.9% while the market ‘only’ lost -51.0%, for an excess loss of -8.9 percentage points.
The low beta stocks lost -42.8% versus the S&P 500’s -51.0%, meaning it outperformed the S&P (lost less) by 8.2 percentage points.
However, during the periods of 3/6/09 thru 8/28/09 (the period immediately following the market’s low), the high beta stocks showed a compounded return of 127.8% vs. the S&P’s 52.5%, nearly two and a half times the market’s return.
The low beta stocks, however, showed just a 29.1% return, well under the market’s 52.5% performance.
(All of the tests were applied to stocks with prices >= $5 and average daily share volume of >= 50,000.)
So, true to form, the high beta stocks DID show greater movement than their low beta counterparts – on both the upside and downside.
The reason why I’m singling out high beta stocks now is because they didn’t lose as much on the way down as you might’ve expected, but the excess return on the way up is staggering.
And by focusing on the strongest of the high beta stocks, these should be the ones to outperform the most as the market continues on.
Here’s a screen I’m currently using to scan for good stocks with betas 50% or higher than the market:
- Zacks Rank = 1 (Only Strong Buys)
- Beta >= 1.5 (At least 50% more than the market)
- Price >= 5
- Avg. 20-day Volume >= 50,000
Here are 5 stocks from this list:
EXPE Expedia, Inc.
MAS Masco Corp.
NP Neenah Paper, Inc.
NTY NBTY, Inc.
WHR Whirlpool Corp.
Start using the beta indicator in some of your own screens and see what kinds of stocks are put on your radar. Strong fundamentals combined with the potential to respond even greater than the market could be a winning combination. And be sure to test it all out with our backtesting feature. Sign up for a free trial to the Research Wizard today: http://at.zacks.com/?id=5529.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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