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.
Beta is a statistical measure that regresses the volatility of a stock to the market (typically the S&P 500). Regression analysis provides a data point that gives reference to the correlation of an investment to the S&P 500. Therefore, a beta of 1 indicates that a stock’s volatility is parallel that of the market. A beta of above 1 means that the stock will have greater volatility than the market and a beta less than 1 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.
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 of 5.8%.
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. 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.
These three stocks were screened by beta and one-year performance across the U.S. market using CNBC’s stock screener. Stocks are listed below by one-year total return as of October 17, 2018.
Largo Resources (LGO)
Largo Resources is a basic materials company in the industrial metals and minerals sector. It explores for and develops natural resources. Its primary operations are in Brazil and Canada. It focuses on the following metals and minerals: vanadium, iron, tungsten, molybdenum, chromite, palladium and platinum.
The company trades at $3.80. It has a one-year return of 308.89%. Trailing twelve-month (TTM) revenue for the company is $229 million with a 109% one-year revenue growth rate. TTM operating income and net income have been $157 million and -$8.92 million respectively. The stock has a market cap of $1.4 billion and a beta of 2.72.
California Resources Corp (CRC)
California Resources Corp is an energy company involved in oil and gas exploration and production. The company operates primarily in California.
CRC trades at $37.51. It has a one-year return of 268.70%. TTM revenue for the company is $2.15 billion. The company has seen lower revenue growth with some recently improved operating margins. The company has recently acquired Elk Hills and entered into a joint venture with Royale resulting in an increase to its production estimates for the near term. CRC has also seen some increased institutional buying with Blackrock reporting ownership of 3.03 million shares, recently buying 156,881 shares during the latest reporting period.
CRC has a market cap of $1.89 billion. Its beta is 6.26.
Vericel Corp (VCEL)
Vericel is a healthcare, biotechnology company. It trades with Nasdaq at approximately $12 per share. The company’s operations are focused on cellular therapies using a patient’s own cells known as autologous cells. Its two primary products MACI and EPICEL are used respectively in treatments for cartilage defects and patients with severe burns.
VCEL has a one-year return of 156.57%. TTM revenue is $75 million with a one-year growth rate of 18% and a three year annualize growth rate of 30%. Operating and net income have been negative over the past year at -$11 million and -$16 million. Revenue is expected to continue growing at a healthy rate with net income topping off from capital expenditures in the near term. Analysts have a $16 one-year target price for the stock.
VCEL has a market cap of $545 million. Its beta is 4.78.
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 mid cap territory. Each have 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.