375 of BSE 500 stocks outperform Sensex return

Riding on a strong market sentiment, these stocks have outperformed the bellwether.
The flip side is, they can fall faster when the tide turns, says Ashley Coutinho.

The surge in the market in the past year and hope of a further rally have put the spotlight back on high-beta stocks.

Beta is a measure of a scrip's volatility or price risk.

A beta of one means the scrip moves in line with the market; higher than one means the volatility is more than the general market.

If a stock's beta is 1.2, it's theoretically 20 per cent more volatile than the market.

Three-fourths of stocks (375) from the BSE 500 pack with a beta greater than one have outperformed the benchmark 30-share Sensex.

On the other hand, only about half the stocks with a beta of less than one have edged past the index.

The 91 stocks with a beta of more than 1.5 have yielded average returns of 55 per cent in the past one year, compared with 15 per cent given by the Sensex.

Sixteen of these stocks have more than doubled investors' wealth in this period.

The group of 174 stocks with a beta of between one and 1.5 gave an average return of 41 per cent; the prices of 11 of these more than doubled.

In contrast, the 220 stocks with a beta of less than one have yielded an average return of 23 per cent, with seven stocks doubling in value.

"When the markets are on a sustained upswing, investors like to put money in stocks with higher volatility, and where they see momentum," said A K Prabhakar, head of research at IDBI Capital Markets.

These could be stocks that move four to five per cent intra-day or in a few days, he said. Prabhakar added that high-beta stocks had especially run up after demonetisation especially in real estate and banking.

Owning high-beta stocks can work both ways.

In times of sustained market falls, these stocks have a tendency to fall more than the market. Investors need to keep this in mind, too.

"High-beta names dominating indicate a lot of froth in the market. We have seen a lot of stocks without strong fundamentals do better than the market. A lot of euphoria is seen, particularly in the small-cap and mid-cap space. The rally in these pockets has got stretched in recent months," said Hemant Nahata, senior derivatives analyst at IIFL Wealth Management.

The BSE Smallcap and Midcap indices have gained 37 and 32 per cent, respectively, in the past year.

Opting for high-beta stocks will continue to work only if the broader market continues to outperform, say experts.

Photograph: Kind courtesy Sam Valadi/Creative Commons