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Highlighted stocks include: Align Technology, Inc. (ALGN - Analyst Report), Dynamic Materials Corporation (BOOM - Snapshot Report), Monarch Casino & Resort, Inc. (MCRI - Snapshot Report), Texas Industries, Inc. (TXI - Snapshot Report) and Valmont Industries, Inc. (VMI - Analyst Report)
I've written about low beta stocks in these articles before, but I've never written about high beta stocks - until now.
That's one more thing I can cross off my list of things to do in 2008.
What is Beta?
First and foremost, "beta" is a measure of an asset's risk relative to the "market" (usually the S&P 500). Beta is 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 the stock's excess movement or "return".)
For instance, a beta of 1.5, will have 1.5x the market's movement (50% more movement than the market). But if the market is plummeting, more than likely the stock is dropping even more than the market.
Of course, if the market is going up, high beta stocks should be going up 1.5x (or 50% more) than the market.
So why am I looking at high beta stocks now?
Here are some recent statistics.
I ran several tests on the Research Wizard. The first ones I did were for stocks with beta's half as much as the market and the other with beta's fifty percent more than the market.
The results of this test didn't really surprise me that much, although the high beta stocks didn't lose as much as one would have thought given it's 50% excess co-movement measure. Likewise, the low beta stocks didn't do as well as the beta measure would have suggested.
Nonetheless, the high beta stocks, using a 1-week rebalancing method between Jan 4, 2008 and Dec 19, 2008, lost -44.3% while the market "only" lost -36.7%, for an excess loss of -7.6 percentage points.
The low beta stocks lost -31.1% versus the S&P 500's -36.7%, meaning they outperformed the S&P 500 by 8.4 percentage points. (The low beta stocks lost less money.)
However, during the periods of Nov 21, 2008 through Dec 19, 2008 (the period immediately following the market's low), the high beta stocks showed a compounded return of 32.1% versus the 11.3% for the S&P 500, nearly tripling the market's return.
The low beta stocks however, showed just a 9.4% return, just under the market's 11.3% 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 have been beaten down pretty hard already. And by trying to find the strongest of the high beta stocks, I'm trying to identify those stocks that should outperform on any rebound.
Of course, beta alone isn't a magic item, but used in conjunction with other proven stock picking techniques, it can help you maximize up moves in the market.
Here's a screen I'm currently using to scan for good stocks with betas 50% or higher than the market.
Beta >= 1.5
Price >= 5
Avg. 20-day Volume >= 50,000
Here are 5 stocks from this list:
(ALGN - Analyst Report) - Align Technology, Inc.
(BOOM - Snapshot Report) - Dynamic Materials Corporation
(MCRI - Snapshot Report) - Monarch Casino & Resort, Inc.
(TXI - Snapshot Report) - Texas Industries, Inc.
(VMI - Analyst Report) - Valmont Industries, Inc.
Start using the beta indicator in some of your own screens and see what kinds of stocks are put on your radar screen. 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. You can do it. Sign up for a free trial to the Research Wizard today. http://researchwiz.zacks.com
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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.