Highly volatile stocks give better returns

Kumar Shankar Roy

CHENNAI: For investors who chose to stick on with high-beta stocks, which are more volatile than their benchmark, the bet seems to have paid off.

In the last 30 days, the top BSE-listed 100 stocks with highest beta have given an average 32% more than the benchmark’s returns (of around 28%) while the 100 stocks with lowest beta have underperformed sensex by 7% in the same time, data from CMIE shows.

A beta of greater than 1 indicates that the stocks’ price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market - which means if market goes up 100%, the stock will go up 120%.

An analysis of the 30-day returns shows that stocks such as India Infoline (beta of 2), Orbit Corporation (beta of 1.93), Unitech (beta of 1.86), IFCI (beta of 1.71), Everonn Systems (beta of 1.69), Hindustan Construction (beta of 1.66), Aptech (beta of 1.62) have all delivered over 50% excess returns than sensex in the last 30 trading sessions.

“Investors should stick to high-beta stocks with good fundamentals. With the outlook of equity markets changing and inflows turning positive, high beta stocks will continue to outperform. While the argument of valuations slightly on the higher side is partially true, earnings are likely to play catch up. High growth sectors will have high beta values and investors will definitely chase them,” K Ramanathan, vice-president of ING Investment Management , said.

Overall around 1,100 stocks with higher beta than 1, have given an average 20% more gains than Sensex. Conversely, around a similar number of stocks with beta values less than 1, have given an average 30-day return similar to Sensex. This clearly shows that as the market moved up, investors who opted for high-beta stocks were rewarded with higher gains.

Low-beta stocks which act as great capital protectors during a market downturn do not participate when the market starts moving up. Usually defensive-sector stocks such as auto, FMCG and pharma have low beta values and hence it is no surprise to see stocks such as Nestle (beta of 0.32), Elder Health (beta of 0.36), Asian Paints (beta of 0.38), Godrej Consumer (beta of 0.40), Hero Honda (beta of 0.47), Dr Reddy’s (beta of 0.51) giving flat returns or worst, recording negative returns in the same 30 trading sessions. [From Internet]