Typically, the S&P 500 is used to determine a stock's volatility in comparison to the market as a whole. In other words, it informs investors regarding the volatility of a specific stock. The Beta of the market is always 1, and a stock with a beta greater than one is considered volatile.
This suggests that it is more adaptable than the competition. A stock with a beta of 1.5 will rise or fall by 50 percent more than the market as a whole. The same holds for stocks with a beta less than 1; such stocks move more slowly than the market as a whole.
However, market performance in 2022 is not exceptionally strong. The S&P 500 has decreased from 4,796.56 on January 3 to its current level of approximately 4,280. Consequently, some investors seek out stocks with a high beta to time the market. These investors believe that once the market reaches an inflection point, these high beta stocks will increase faster than the overall market. Those investors will be in an ideal position to reap profits.
What is Beta?
Beta gauges the volatility of a stock relative to the overall market or an index it follows. The market's beta value is always 1, and stocks are allocated a beta value based on their divergence from market returns. The beta value of a stock that is more volatile than the market is greater than 1. Similarly, if a corporation exhibits lower-than-average market volatility, it is assigned a beta number less than 1.
High beta stocks have traditionally outperformed the market, hence their importance to investors. While beta values have historically been used to calculate the volatility of stocks, it is unwise to rely solely on Beta to determine a company's potential.
Suppose a trader watches the market's general movement by observing the change in the value of the S&P 500 market index. Assume that the S&P 500 market index advances 1% throughout today's trading session. The trader also invests in select stocks, such as Apple Inc. (AAPL), whose stock price rose +2% during today's trading session. In essence, the fluctuation of Apple's stock price during the same period is double that of the S&P 500 market index. This causes Apple stock to be twice as susceptible to change as the S&P 500 index, representing the market as a whole. This relationship between Apple and the market is represented by a beta value of 2 in this case.
Similarly, suppose that the price of Wal-Mart Inc. (WMT) decreases by 3% during the same trading session. Compared to the entire market represented by the S&P 500, which had a price increase of 1%, Wal-stock Mart's price decreased by 3%. In this situation, the beta value of Wal-Mart stock will be -3.
Investors and traders frequently seek out stocks with beta values of at least +1.5, as when the market as a whole change, these stocks move with considerably greater magnitude.
What Does a 1.5 Beta Mean?
Knowing that the Beta of the S&P 500 is 1.0 and the stock within the primary market index has a beta of 1.5 indicates that the stock is 50% more volatile than the market.
Some people link Beta with risk. However, this is not always accurate. Volatility and risk are distinct concepts. It is possible, for instance, that the market advances up 1% while a stock with a high beta falls 1%, rises 2%, and ends the day up 1%, just like the market. In this instance, the stock was significantly more volatile than the primary market index, but its share price increased by the same percentage as the index: 1%.
Beta and Risk
Beta is a statistical measure of a stock's volatility relative to the market (usually the S&P 500), which can be regarded as a measure of risk. A stock's Beta is determined by regression analysis that infers the connection between the stock's price fluctuations and those of the S&P 500. Consequently, a beta of 1.0 suggests that a stock's volatility is equivalent to the market's and will often move in tandem with the index to the same degree.
A beta above 1.0 signifies that the stock will have greater volatility than the market, while a beta below 1.0 indicates reduced volatility. Volatility is typically indicative of risk, with more significant betas indicating higher risk and lower betas indicating lower risk. Thus, stocks with more significant betas may have greater gains in bull markets and losses in bear markets.
1. Albemarle (ALB)
Albemarle's (NYSE: ALB) stock was an attractive investment for most of 2021 due to its position as a lithium manufacturer. Lithium is an integral part of electric vehicle batteries. As a result, Albemarle made numerous headlines as EV stock prices reached all-time highs. Beginning in late 2021, however, EV stocks experienced a sharp reversal as rising inflation rates knocked the wind out of the sails of growth stocks.
This slide has not spared Albemarle, which has fallen from $235 to less than $200; however, there is a catch: Albemarle has a five-year monthly beta of 1.56. This suggests that whenever EV stocks return to favor, Albemarle should return to favor even more quickly.
There are numerous reasons to anticipate that Albemarle will return. The company had $3.3 billion in revenue in 2021 and is projected to generate approximately $4.4 billion in sales in 2022.
When the comeback occurs, investors will be pleased since ALB stock has significant upside potential. The highest price estimate among analysts for ALB stock is $307, and it is now trading below $195 and has an average price target of around $248.
2. Intuit Inc. (INTU)
Intuit, located in Mountain View, California, is a cloud-based accounting and tax preparation software business. Its products provide financial management, compliance, and services to consumers, small enterprises, independent contractors, and accounting professionals globally. QuickBooks, TurboTax, Mint, and TSheets are its four most popular platforms. They collectively service over 100 million customers. The stock possesses a 5-year Beta of 1.68.
3. Baker Hughes Company (BKR)
Baker Hughes Company is an American industrial services provider and one of the world's foremost oil field services providers. Baker Hughes Company provides oil drilling, formation evaluation, completion, production, and reservoir consultancy products and services.
On January 26, Barclays analyst J. David Anderson increased the price objective for Baker Hughes Company from $30 to $31 and maintained an Overweight rating on the stock. According to the analyst, the "Big 3" in energy services all outperformed expectations in the fourth quarter and are poised to outperform as upstream spending declines and investors reward operating leverage, rising pricing power, and better capital returns.
The Baker Hughes Company declared a $0.18 per share quarterly dividend on October 22. This is consistent with prior dividends. The dividend was paid to shareholders of record from November 2 to November 12. Baker Hughes Company (NASDAQ: BKR) gives a dividend yield of 2.60 percent as of January 25.
In the third quarter of 2021, 37 hedge funds tracked by Insider Monkey had over $1 billion in Baker Hughes Company shares. Baker Hughes Company's largest shareholder is Pzena Investment Management, which owns more than 24 million shares worth $598.6 million.
4. Best Buy Co., Inc. (BBY)
Best Buy Co., Inc. is an international retailer of consumer electronics in the United States, Canada, and Puerto Rico. Best Buy Co., Inc. gives a dividend yield of 2.89 percent as of January 26. Earnings and revenue for the third quarter of 2021 were more significant than the consensus estimate.
On November 24, Best Buy Co., Inc. declared a $0.70 per share quarterly dividend, the same as in the past. The dividend was paid to shareholders of record as of December 14 on January 4.
On January 12, analyst Scot Ciccarelli commenced coverage of Best Buy Co., Inc. with a Hold rating and a price target of $108. According to the analyst, the company's sales increased during the pandemic, but the multi-year replacement cycle for these goods will likely work against it and result in a short growth cycle.
Among the hedge funds followed by Insider Monkey during the third quarter of 2021, QAR Capital Management holds the most significant investment in the company, with around $177 million worth of 1,6 million shares. 29 hedge funds reported holding around $680 million worth of Best Buy Co., Inc. shares in the third quarter of 2021.
5. Alcoa Corp (AA)
Alcoa Corp (NYSE: AA) is an aluminum-producing firm. Alcoa Corporation has seen rising input costs, as have many businesses, and the company appears to have handled these rising costs appropriately.
Alcoa recorded earnings per share of $3.06 in its most recent earnings release, while Wall Street anticipated $2.88 per share. This indicates that Alcoa could control expenses, resulting in higher earnings per share than anticipated. However, Alcoa fell short of revenue projections, posting $3.3 billion in sales as opposed to the anticipated $3.5 billion. This income shortfall caused AA stock to plummet, falling from $86 to $67 in a couple of days.
However, Alcoa can recover quickly. For starters, Alcoa's five-year monthly Beta is 2.3. This means it can rise approximately 130% faster than the market as a whole. To believe that Alcoa will recover, investors must be hopeful about two factors: first, the dramatic decline in AA shares was exaggerated. Second, prices for inputs such as the aluminum produced by Alcoa are not decreasing. However, these costs are at an all-time low for the current few months. Therefore, it may not be the ideal time to invest in Alcoa. However, if there is any indication that aluminum prices may surge, Alcoa's Beta of 2.3 will cause the stock to rise sharply.
6. ServiceNow (NOW)
ServiceNow is a high-quality technology business that modernizes manual work processes with digital workflows. It decreases the complexity of tasks and makes employees' work more enjoyable, resulting in higher output.
ServiceNow has more than 7,400 enterprise clients, including over 80% of the Fortune 500. All of these clients utilize the Now Platform, an intelligent cloud platform that facilitates digital transformation.
7. Boston Properties, Inc. (NYSE: BXP)
Boston Properties, Inc. is a publicly traded REIT that primarily invests in office space in Boston, Los Angeles, New York City, San Francisco, and Washington.
Boston Properties guided for Q1 2022 on January 26. The company anticipates an FFO of $1.72 to $1.74, compared to $1.73 in the third quarter of 2021, and an FFO of $7.30 to $7.45 for the entire year of 2022, vs. $7.25 to $7.45 in the prior forecast, citing improved portfolio performance.
On January 20, analyst Vikram Malhotra from Mizuho boosted Boston Properties' price target from $115 to $120 while maintaining a Neutral rating on the stock. Malhotra tells investors in a research note that after beating the S&P 500 Index in 2021, the real estate investment trust sector confronts a "tricky macro set-up" in 2022.
Beginning in the third quarter of 2021, TCI Fund Management, managed by Chris Hohn, is the most prominent Boston Properties shareholder, with about 13 million shares worth $1.40 billion. United Rentals is the largest equipment rental company in the world, serving North American clients primarily.
In addition to dividend-paying stocks such as Best Buy Co., Inc., Exxon Mobil Corporation, and Chevron Corporation, hedge funds are investing heavily in Boston Properties.
8. NVIDIA Corporation (NVDA)
NVIDIA Corporation is a specialist semiconductor manufacturer that creates and produces graphics processors, chipsets, and related software products.
Its products include specialized processors for gaming, design, artificial intelligence, data science, extensive data research, and chips for autonomous vehicles and robots. The stock possesses a 5-year Beta of 2.30.
9. United Rentals, Inc. (URI)
URI is the largest equipment rental company in the world, serving North American clients primarily. Since its founding in 1997, URI has amassed a rental fleet of almost 700,000 pieces of heavy equipment worth close to $15 billion. However, the company operates in a highly cyclical and commoditized industry. It is significantly impacted by slight variations in demand, such as those caused by contractions in the construction or building industries, among others. Thus, the stock's Beta was 2.28.
10. SVB Financial Group (SIVB)
Silicon Valley Bank is owned and run by SVB Financial Group, which serves customers in this prosperous region of California. According to the company's website, Silicon Valley Bank has helped fund over 30,000 startups, and SVB is included in the list of the nation's central banks. Additionally, the bank is one of the leading financial services providers to Napa Valley wine producers. Due to the company's comparatively limited market and riskier customers, the stock had a beta of 2.25.
Final Thoughts
When selecting prospective investments, investors must take risk into account. Ultimately, if two securities have comparable predicted returns. However, if one has a considerably lower Beta, the investor would do well to select the security with the lower Beta, as it would provide superior risk-adjusted returns.
Using Beta, investors can assess which securities, such as those listed here will exhibit greater volatility than the market as a whole. The five stocks analyzed provide investors with high Beta scores and significant expected returns. These names and others like them on our list of the ten most excellent high Beta stocks will help investors who desire a riskier portfolio know what to look for when selecting a high Beta stock to purchase.
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