Beta Measures A Stock’s Volatility And Its Ability To Rally
BY CRAIG SHAWINVESTOR'S BUSINESS DAILY
Somestocks trade calmly while otherscan shake you silly. One way togauge a stock’s trading habits is byeyeballing its beta score.
Beta helps measure volatility. Astock’s beta calculates its priceswings vs. theS&P500 over the past12 months. A beta of 1.50 means thestock is on average 50% wilder thanthebenchmarkindex.
Volatility differs among sectorsand stocks. A small-cap tech stockmay show dizzying price swings,while a lumbering large cap maybuild a gradual uptrend. Either onecould be a winner. Knowing how astock trades can help you avoidshakeoutsandpreserve profits.
All things considered, it’s better tobuy a stock that shapes a tight base,nota wildandloose one.Gradualdeclineson the left side of a patternand steady progress on the rightshowinstitutional support.
Still, plenty of volatile stocks haveranked among recent leaders. If youhave the stomach to ride out theirprice swings, youcan benefit.
Alpha tracks how much a stockwouldrise or fall over a year’s time ifthe S&P 500 stayed flat. It measuresa stock’s “excess” gain or decline.IBD Stock Checkup at investors.com lists a stock’s alpha and betascores underVital Statistics.
Remember,alpha andbeta are secondaryindicators.Astockmayhavea beta of 1.5 because its rally and institutionaltrading are both strong.
Excellent fundamentals, membershipin a leading industry group,strong management and other factorscarrymorevaluethana beta rating.Also, a stock’s price-and-volumeaction and the market’s overallhealthremain your primary buyandsell signals.
A glance at some of the market’scurrent leaders shows volatility canvary widely. The table above lists adozen stocks with EPS and RS Ratingsof 80or better anddaily volumeabove 100,000 shares. Their betascores rangefrom 0.49 to 2.40.
YahooYHOO and rapid prototypingdevice maker StratasysSSYS sportbetas above 2.0. Both were big winnersin 2003 and are now building
the right sides of basing patterns despitebeing more than twice as volatileas theS&P500.
Onthe otherhand,TVstation operatorCentral European MediaCETVhas a beta of just 0.49. It’s traced arelatively calm uptrend since itsMay 2004 breakout. Transactionservices provider Alliance Data SystemsADS,which broke out of a3 1/2-month base last week, also hasa betabelow 1.0.