Trading High-Beta Stocks: Risk vs. Reward

Growth investors and investors with high-risk tolerance may be interested in looking for high-growth, high-beta stocks. High-beta stocks can be used for generating high returns but they also have significant downside risk when markets fall. Understanding beta and its uses can be important for growth investors seeking to identify the best-performing stocks at large.

Below we take a look at the market’s highest beta stocks with the highest returns. While past performance is not an indication of future results, these stocks have been able to significantly outperform the S&P 500’s one-year return.

Key Takeaways

  • High beta stocks are those that are positively correlated with returns of the S&P 500, but at an amplified magnitude.
  • Because of this amplification, these stocks tend to outperform in bull markets, but can greatly underperform in bear markets.
  • Here, we look at 3 of the highest beta stocks among the S&P 500 companies in 2019 as illustrative examples.

Beta and Risk

Beta is a statistical measure of a stock's relative volatility to that of the broader market (typically the S&P 500), where it can be interpreted as a measure of riskiness. A stock's beta is arrived at using regression analysis that infers the correlation in price changes in the stock to the S&P 500. Therefore, a beta of 1.0 indicates that a stock’s volatility is parallel to that of the market, and so will often move in tandem with the index and at the same magnitudes.

A beta of above 1.0 means that the stock will have greater volatility than the market and a beta less than 1.0 indicates lower volatility. Volatility is usually an indicator of risk and higher betas mean higher risk while lower betas mean lower risk. Thus, stocks with higher betas may gain more in up markets but also lose more in down markets.

Investing in High Beta Stocks

High beta stocks can be great investments in bull markets since they are expected to outperform the S&P 500 by a marginal amount. They do however require a great deal of active management due to their market sensitivity. These are highly volatile and therefore risky investments in isolation. Thus, in the case of a bear market reversal, these stocks could also be expected to lose the most, so it is important to keep an eye on them as high beta stocks are generally not long-term buy-and-hold investments.

Historical Examples of High-Beta Stocks

Below, we look at three stocks from the year 2019 as historical examples of stocks with betas of around 2.5, and which were members of the S&P 500 index. Note that these historical examples are for informational purposes only to give insight into how high-beta stocks typically behave, and are intended as investment advice.

Advanced Micro Devices (AMD)

AMD is a semiconductor company that makes chipsets and microchips, competing with the likes of Intel and Qualcom. In 2019, shares of AMD more than doubled in value—its market cap as of June 2020 is $53 billion. Despite its bullish run, the company remained riskier than most S&P 500 stocks, with a beta of 2.12.

SVB Financial Group (SIVB)

SVB Financial group owns and operated Silicon Valley Bank, servicing clients in that rich region of California. According to the company's website, Silicon Valley Bank has helped fund more than 30,000 start-ups. SVB is on the list of largest banks in the United States. The bank is also one of the largest providers of financial services to wine producers in Napa Valley. Because of its relative niche market and riskier clientele, the company's shares carried a beta of 2.25.

United Rentals, Inc. (URI)

United Rentals is the largest equipment rental company in the world, servicing customers mainly in the United States and Canada. Founded in 1997, URI now owns nearly 700,000 pieces of heavy equipment for rent, worth nearly $15 billion. However, the company operates in a highly cyclical and commoditized industry and is greatly impacted by small changes in demand that can arise from contractions in the construction or building industries, among others. The stock thus had a beta of 2.28.

The Bottom Line

High beta stocks require a great deal of active management. They are also often small to mid-cap stocks that are maturing with significant volatility around new announcements. All three of the stocks here are in the small-cap realm with Largo and California Resources pushing into the mid-cap territory. Each has a few growth catalysts that have helped to propel their returns.

Keep in mind, that investing in high growth, high beta stocks also comes with high risks so it is important to monitor these investments and also seek to balance them with lower risk portfolio holdings and cash for liquidity.

Article Sources
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  2. CNBC. "Advanced Micro Devices Inc."

  3. SVB. "Silicon Valley Bank Celebrates 20 Years of Dedication to Entrepreneurs."

  4. Forbes. "America's Biggest Banks: JP Morgan, Wells Fargo Keep Growing While BofA, Citi Shrink."

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  6. United Rentals. "United Rentals 2019 Annual Report," Page 3.

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  8. CNBC. "United Rentals Inc."

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