Screen of the Week 11/30/2010: High Beta Stocks [stocksmarketarticles]

Screen of the Week 11/30/2010: High Beta Stocks [stocksmarketarticles]

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I've written about low beta stocks before as a way to find stocks with lower volatility. But this week I want to focus on higher beta stocks as a way to increase your returns.

 

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 in that 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 -60.0%, while the market 'only' lost -50.1%, for an excess loss of -9.9 percentage points.

The low beta stocks lost -43.0% versus the S&P 500's -50.1%, meaning it outperformed the S&P (lost less) by 7.1 percentage points. However, during the periods of 3/6/09 thru 11/19/10 (the period immediately following the market's low to the present), the high beta stocks showed a compounded return of 213.3% vs. the S&P's 81.6%, which is more than two and a half times the market's return. The low beta stocks, however, showed just a 52.3% return, well under the market's 81.6% 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 â€" on both the upside and the downside. But 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 market the most as the market continues on. Here's a screen I'm currently using to scan for good stocks with betas 50% or more than the market:

 

* Beta >= 1.5

* One Year Projected Growth Rate > 1.20* the Median for its Industry

* Last EPS Surprise > 0

* Last Sales Surprise > 0

* Price to Sales less than the Median for its Industry

* Price >= 5

* Avg. 20-day Volume >= 50,000

 

Here are 5 stocks from this list:

ABG - Asbury Automotive Group, Inc. AIMC - Altra Holdings, Inc. CBG - CB Richard Ellis Group, Inc. DLX - Deluxe Corp. NEWP - Newport Corp.

 

Start using the beta indicator in some of your own screens and then add some of your favorite screening criteria to further narrow down the list. Strong fundamentals combined with the potential to show an outsized response can be a winning combination. And be sure to test it all out by backtesting it first. Sign up for a free trial to the Research Wizard today.

 

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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