Investing in high beta stocks is akin to playing a high stakes game of poker in Vegas.
When you are on a winning streak, stocks with high beta can produce market-beating returns. But when the tide turns, your portfolio balance may plummet faster than a lead balloon.
What Is Beta?
The risks and rewards are amplified when trading high beta stocks because beta measures the volatility of a stock in relation to the market.
The stock market has a beta of 1.0 and numbers higher or lower than that indicate how far a stock’s returns deviate from the general market’s returns.
What Does A Beta Of 1.5 Mean?
If you know the S&P 500 beta is 1.0 but a stock within the major market index has a beta of 1.5, it suggests that the stock is 50% more volatile than the market.
Some people equate beta to risk but this isn’t necessarily correct. Volatility and risk are two separate things.
It’s possible for example that the stock market moves up 1% while, at the same time, stock with high beta falls 1%, rises 2%, and closes the day up 1%, just like the market itself.
In that case, the stock was far more volatile than the major market index but if you looked at where its share price closed at the end of the day it rose by the exact same percentage amount: 1%.
High Beta ETF: PowerShares S&P 500 High Beta Portfolio
Stocks aren’t the only securities where you can find high betas. High beta ETFs are available too, meaning stock market gains and losses are amplified.
The PowerShares S&P 500 High Beta Portfolio [SPHB] ETF tracks the investment results of the S&P 500 High Beta Index.
Stocks With High Beta Values
If you are looking for stocks with high beta, you don’t have to look very far. Here’s a high beta stocks list:
Autohome [ATHM] is an online company where Chinese consumers can access automobile content, such as reviews, vehicle pricing trends, photographs, video clips, and even live streaming.
Whether researching retail prices or powertrains, Chinese consumers rely on Autohome, but just because the online destination has grown to be a multi-billion dollar company doesn’t mean that investing in the stock is a walk in the park.
In fact ATHM has a beta of nearly 2.0 at last count, meaning that it is about twice as volatile as the actual market.
MercadoLibre [MELI] is another company based overseas which has a high beta.
You can think of MercadoLibre as the Ebay [EBAY] of Latin America. It is an online e-commerce marketplace where individuals and businesses can buy and sell goods in a fixed-price or auction-based format.
Originally founded in Buenos Aires, Argentina, MercadoLibre now has a presence across Latin America but all that expansion hasn’t come without its fair share of share price undulations which in turn have resulted in a beta of 2.21 at the time of our research.
If you want a slow and stable stock with little excitement, you will need to look elsewhere because MercadoLibre [MELI] is more of a high flier that could experience fast dips and sharp ascents. The bottom line is you will need to brace yourself for turbulence.
Splunk [SPLK] is a high beta company based in the United States. With a beta of 1.49, Splunk is 49% more volatile than the stock market according to that metric.
It’s not a big surprise why it is so volatile. After all, Splunk is a software solutions company that makes it possible for businesses to gain real-time operational intelligence.
It targets a wide variety of industries, including financial services, government, education, pharmaceuticals, retail, telecommunications, education, media, and healthcare.
Do you have a list of high beta stocks that you trade? Let us know when you get started at Financhill.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.