Updated on July 23rd, 2020 by Bob Ciura
Spreadsheet data updated daily, constituents updated quarterly
In the world of investing, volatility matters. Investors are reminded of this every time there is a downturn in the broader market and individual stocks that are more volatile than others experience enormous swings in price in both directions. That volatility can increase the risk in an individual’s stock portfolio relative to the broader market.
The volatility of a security or portfolio against a benchmark – is called Beta. In short, Beta is measured via a formula that calculates the price risk of a security or portfolio against a benchmark, which is typically the broader market as measured by the S&P 500 Index.
It is helpful in understanding the overall price risk level for investors during market downturns in particular.
High Beta stocks are not a sure bet during bull markets to outperform, so investors should be judicious when adding high Beta stocks to a portfolio, as the weight of the evidence suggests they are more likely to underperform during periods of market weakness.
However, for those investors interested in adding a bit more risk to their portfolio, we’ve put together a list to help investors find the best high beta stocks.
You can download your free High Beta stocks list (along with relevant financial metrics such as dividend yields and price-to-earnings ratios) by clicking on the link below:
This article will provide an overview of Beta. In addition, we will discuss how to calculate Beta, incorporating Beta into the Capital Asset Pricing Model, and provide analysis on the top 5 highest-Beta stocks in our coverage database.
The table of contents below provides for easy navigation:
Table of Contents
- High Beta Stocks Versus Low Beta Stocks
- How To Calculate Beta
- Beta & The Capital Asset Pricing Model (CAPM)
- Analysis On The 5 Highest-Beta Stocks
- Final Thoughts
High Beta Stocks Versus Low Beta
Here’s how to read stock betas:
- A beta of 1.0 means the stock moves equally with the S&P 500
- A beta of 2.0 means the stock moves twice as much as the S&P 500
- A beta of 0.0 means the stocks moves don’t correlate with the S&P 500
- A beta of -1.0 means the stock moves precisely opposite the S&P 500
The higher the Beta value, the more volatility the stock or portfolio should exhibit against the benchmark. This can be beneficial for those investors that prefer to take a bit more risk in the market as stocks that are more volatile – that is, those with higher Beta values – should outperform the benchmark (in theory) during bull markets.
However, Beta works both ways and can certainly lead to larger drawdowns during periods of market weakness. Importantly, Beta simply measures the size of the moves a security makes.
Intuitively, it would make sense that high Beta stocks would outperform during bull markets. After all, these stocks should be achieving more than the benchmark’s returns given their high Beta values. While this can be true over short periods of time – particularly the strongest parts of the bull market – the high Beta names are generally the first to be sold heavily by investors.
This excellent paper from the CFA Institute theorizes that this is true because investors are able to use leverage to bid up momentum names with high Beta values and thus, on average, these stocks have lower prospective returns at any given time. In addition, leveraged positions are among the first to be sold by investors during weak periods because of margin requirements or other financing concerns that come up during bear markets.
In other words, while high Beta names may outperform while the market is strong, as signs of weakness begin to show, high Beta names are the first to be sold and generally, much more strongly than the benchmark.
Indeed, evidence suggests that during good years for the market, high Beta names capture 138% of the market’s total returns. In other words, if the market returned 10% in a year, high Beta names would, on average, produce 13.8% returns. However, during down years, high Beta names capture 243% of the market’s returns.
In a similar example, if the market lost 10% during a year, the group of high Beta names would have returned -24.3%. Given this relatively small outperformance during good times and vast underperformance during weak periods, it is easy to see why we prefer low Beta stocks.
While low Beta stocks aren’t a vaccine against downturns in the market, it is much easier to make the case over the long run for low Beta stocks versus high Beta given how each group performs during bull and bear markets.
How To Calculate Beta
The formula to calculate a security’s Beta is fairly straightforward. The result, expressed as a number, shows the security’s tendency to move with the benchmark.
In other words, a Beta value of 1.00 means that the security in question should move virtually in lockstep with the benchmark (as discussed briefly in the introduction of this article). A Beta of 2.00 means moves should be twice as large in magnitude while a negative Beta means that returns in the security and benchmark are negatively correlated; these securities tend to move in the opposite direction from the benchmark.
This sort of security would be helpful to mitigate broad market weakness in one’s portfolio as negatively correlated returns would suggest the security in question would rise while the market falls.
For those investors seeking high Beta, stocks with values in excess of 1.3 would be the ones to seek out. These securities would offer investors at least 1.3X the market’s returns for any given period.
Here’s a look at the formula to compute Beta:
The numerator is the covariance of the asset in question while the denominator is the variance of the market. These complicated-sounding variables aren’t actually that difficult to compute.
Here’s an example of the data you’ll need to calculate Beta:
- Risk-free rate (typically Treasuries at least two years out)
- Your asset’s rate of return over some period (typically one year to five years)
- Your benchmark’s rate of return over the same period as the asset
To show how to use these variables to do the calculation of Beta, we’ll assume a risk-free rate of 2%, our stock’s rate of return of 14% and the benchmark’s rate of return of 8%.
You start by subtracting the risk-free rate of return from both the security in question and the benchmark. In this case, our asset’s rate of return net of the risk-free rate would be 12% (14% – 2%). The same calculation for the benchmark would yield 6% (8% – 2%).
These two numbers – 12% and 6%, respectively – are the numerator and denominator for the Beta formula. Twelve divided by six yields a value of 2.00, and that is the Beta for this hypothetical security. On average, we’d expect an asset with this Beta value to be 200% as volatile as the benchmark.
Thinking about it another way, this asset should be about twice as volatile than the benchmark while still having its expected returns correlated in the same direction. That is, returns would be correlated with the market’s overall direction, but would return double what the market did during the period. This would be an example of a very high Beta stock and would offer a significantly higher risk profile than an average or low Beta stock.
Beta & The Capital Asset Pricing Model
The Capital Asset Pricing Model, or CAPM, is a common investing formula that utilizes the Beta calculation to account for the time value of money as well as the risk-adjusted returns expected for a particular asset. Beta is an essential component of the CAPM because without it, riskier securities would appear more favorable to prospective investors as their risk wouldn’t be accounted for in the calculation.
The CAPM formula is as follows:
The variables are defined as:
- ERi = Expected return of investment
- Rf = Risk-free rate
- βi = Beta of the investment
- ERm = Expected return of market
The risk-free rate is the same as in the Beta formula, while the Beta that you’ve already calculated is simply placed into the CAPM formula. The expected return of the market (or benchmark) is placed into the parentheses with the market risk premium, which is also from the Beta formula. This is the expected benchmark’s return minus the risk-free rate.
To continue our example, here is how the CAPM actually works:
ER = 2% + 2.00(8% – 2%)
In this case, our security has an expected return of 14% against an expected benchmark return of 8%. In theory, this security should vastly outperform the market to the upside but keep in mind that during downturns, the security would suffer significantly larger losses than the benchmark. Indeed, if we changed the expected return of the market to -8% instead of +8%, the same equation yields expected returns for our hypothetical security of -18%.
This security would theoretically achieve stronger returns to the upside but certainly much larger losses on the downside, highlighting the risk of high Beta names during anything but strong bull markets. While the CAPM certainly isn’t perfect, it is relatively easy to calculate and gives investors a means of comparison between two investment alternatives.
Analysis On The 5 Highest-Beta Stocks
Now, we’ll take a look at the 5 stocks with the highest Beta scores (in ascending order from lowest to highest).
Apache Corporation (APA)
Apache explores and produces crude oil, natural gas and natural gas liquids (NGLs) in the U.S., Egypt and the North Sea. In 2019, Apache produced about 429,000 barrels of oil equivalent per day (excluding non-controlling interest). In this period, oil, natural gas, and NGLs comprised 83%, 11% and 6%, respectively, of the total revenue of the company. The company is extremely sensitive to the prevailing price of oil and natural gas; much more so than the well-known integrated oil majors like Exxon Mobil (XOM) and Chevron (CVX).
However, Apache is now suffering from the spread of the coronavirus, which has led the oil price to collapse to 18-year lows. As a result, the stock has plunged over 40% year-to-date. In early May, Apache reported (5/6/20) financial results for the first quarter of fiscal 2020. Due to the collapse of the oil price, the company incurred excessive asset impairments and thus reported a loss of -$11.86 per share. While the adjusted loss was only -$0.13 per share, the reported loss was greater than the current market cap of the stock and hence it raises a red flag.
The company also cut its quarterly dividend by -90%. In addition, Apache hedged its production after the collapse of the oil price. This shows the high vulnerability of Apache to the downturn as well as management’s desperation. Due to the pandemic and the depressed oil prices, we expect Apache to lose -$2.60 per share this year, which explains the high volatility of the stock. Shares have a 5-year Beta value of 1.98.
DXC Technology Company (DXC)
DXC Technology Company is a technology services provider. It operates in two segments, Global Business Services (GBS) and Global Infrastructure Services (GIS). The company provides enterprise technology solutions that enable customers to modernize IT, optimize data architectures, and improve security. Its platforms serve 6,000 private and public-sector customers in 70 countries. DXC Technology has a market capitalization of $4.4 billion.
In the most recent quarter, revenue declined 6.9% in constant currency to $4.8 billion. Adjusted earnings-per-share declined 45% year-over-year, as the company continues to work through its turnaround. The company suspended its dividend, and also announced it will sell its healthcare software business for $525 million, to focus on its Enterprise Technology Stack services. The 5-year Beta score is 2.00.
Carnival Cruise Lines (CCL)
Carnival Cruise Lines is a cruise ship operator that has 11 different brands which generate about $17 billion in annual revenue under normalized conditions. However, the shutdowns as a result of COVID-19 should see Carnival produce only about $7 billion in revenue in 2020.
Carnival reported second quarter earnings on June 18th and as expected, results were quite poor. The company hasn’t sailed for months and it said it was pausing cruises until at least September 30th. Revenue for the second quarter was down -86% year-over-year to just $0.7 billion. Total adjusted earnings-per-share came in at a loss of -$3.30 thanks to the huge decline in revenue.
Carnival said it ended the quarter with $7.6 billion of available liquidity, and it expects to further enhance its liquidity profile via refinancing scheduled debt maturities. Investors should not be surprised to see cruise line operators on the list, as the stocks have become increasingly volatile during the coronavirus crisis. The 5-year Beta score is 2.02.
Norwegian Cruise Lines (NCLH)
Norwegian Cruise Line Holdings operates nearly 30 ships that generate just under $7 billion in annual revenue. As a cruise line stock, it is not surprising to see Norwegian on the list of highest-beta stocks, given the extreme volatility among cruise line stocks in the past several weeks due to coronavirus.
Norwegian reported first quarter earnings on May 14th, with earnings coming in very weak. Net loss came to $1.9 billion, or $8.80 per share, down from a profit of $0.54 per share in last year’s first quarter. Approximately $1.6 billion of the $1.9 billion loss was due to a non-cash impairment of goodwill. As a result, adjusted net income was a loss of -$211 million, or -$0.99 per share, compared to a profit of $0.83 in the year-ago period.
Revenue was down -11% to $1.2 billion due to a decrease in capacity days. This, of course, was due to voyage cancellations. Operating expense was up 20% due to voyage cancellations, including the cost of related protected commissions, and significant deleveraging due to plummeting capacity days. The company said it had enough liquidity to survive 18 consecutive months of voyage cancellations. The stock has a 5-year Beta value of 2.15.
Lincoln National Corporation (LNC)
Lincoln National Corporation is a financial services company that provides retirement, insurance, and wealth management services to more than 17 million customers. Lincoln National had $275 billion in assets under management as of December 31, 2019.
The company operates in multiple segments, including Annuities, Retirement Plan Services, Life Insurance, and Group Protection. In the most recent quarter, the company reported solid growth rates across multiple key metrics. Adjusted income from operations increased 5%, while adjusted operating revenue rose 3% thanks to 5% growth in total annuity sales and 11% growth in Retirement Plan Services deposits. Book value per share excluding AOCI increased 2% to $70.24. The 5-year Beta score is 2.36.
Investors must take risk into account when selecting from prospective investments. After all, if two securities are otherwise similar in terms of expected returns but one offers a much lower Beta, the investor would do well to select the low Beta security as it would offer better risk-adjusted returns.
Using Beta can help investors determine which securities will produce more volatility than the broader market, such as the ones listed here. The five stocks we’ve looked at offer investors high Beta scores along with very strong prospective returns. For investors who want to take some additional risk in their portfolio, these names and others like them in our list of the 100 best high Beta stocks can help determine what to look for when selecting a high Beta stock to buy.