Beta is one of the most commonly used measures of risk in
thefinancial markets .
Beta measures the volatility of a particularstock relative to the
broadermarket -- typically, investors use the S&P 500 to
calculate the measure.Stocks that have a beta greater than 1 tend
to be more volatile (and risky) than the broader market. Those
with a beta less than 1 tend to be slower-moving stocks.
The theory is simple: Every stock carries its own unique risks.
While risks may be high for any individual company, they should
balance out across a portfolio containing dozens of companies
from different industry groups. Sure, therewill be a fewlaggards
in a large portfolio thatunderperform , but you're also likely to
hit a few home runs -- and individual stock risks can be largely
diversified away over the long run.
And while you can't eliminate systemic risk
throughdiversification , investors can reduce their exposure amid
weak markets by building a portfolio with a beta of less than 1.
Such a portfolio would tend to fall less than the market during
Of course, there's a trade-off. When the market does recover,
stocks with a beta of less than 1 tend to rise at a slower pace
than the S&P 500 as well.
The basic choice is simple. Select a low-beta portfolio that's
less volatile than the broader market but also produces lower
returns over time, or shoot for strong returns by owning more
volatile stocks and accepting the greater risks.
But, the market never works as smoothly or neatly as financial
models would predict -- there's alot more to successfulinvesting
than balancing risk and return. Some stocks outperform
consistently on a risk-adjustedbasis .
These are exactly the kinds of stocks I like to own.
Another way to calculate beta is to consider how volatile a
particular stock is in rising markets as compared with falling
markets. Investors can calculate abull market beta by examining a
stock's volatility only on days the broader market rises;
similarly, one can calculate abear market beta by looking only at
performance on days the market falls.
Companies with a bull market beta higher than their bear market
beta tend to rise more than the broader market on days when the
market rises and fall less when the broader market takes a
This technique can be used tospot best-of-breed stocks in various
industries. For example, using the past five years' worth of data
to calculate beta for stocks in the S&P 500,
Dollar Tree (Nasdaq: DLTR)
Discover Financial (
stand out as two stocks withbull betas far higher than theirbear
Dollar stores have been among the best-performing stocks in the
United States over the past few years as more budget-conscious
U.S. consumers shop for value. Dollar Tree was one of the only
stocks in theindex to turn in a positive performance in 2008, and
the stock has seen only modest corrections over the past four
years, even when the broader market is weak.
Credit card company Discover Financial is up more than 396%
since the end of 2008, far outpacing the 97%gain in the S&P
500 over the same time. And the stock has seen only two modest
corrections since the 2009 broader market lows.
Both of these stocks are fine options for investors to
consider. But the mission of my newly rebranded newsletter,
, is to go off the beaten path in search of big-time yields. And
if I have to go outside the U.S. to do it, then so be it.
With these points in mind, I scanned StreetAuthority's vast
database of stocks looking for firms domiciled outside the United
States with U.S.-traded ADRs (American depository receipts) and
adividend yield over 3%. I screened for firms with a five-year
bull beta at least 20% higher than their bear market beta. In
addition, I required that the firm's bear market beta be less
than 1.25, limiting my universe to stocks with relatively low
Action to Take -->
Telecommunications stocks, a group that I've profiled before,
screen well on this basis. While I'm not ready to add any of the
stocks in this table to my
portfolios, a number appear to be worthy of further research.
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