Do you have the stomach to handle some volatility in your stocks?
That is shares of companies that bounce around more than the market.
If not, and you’re a long-term buy and hold investor, there may not be much for you to see here.
But if you’re a more active investor or even have the audacity to be a trader, adding some high quality, high volatility stocks could provide some zip to your holdings.
Heightened volatility “is the name of the game,” says David Rosenberg, chief economist and strategist at Rosenberg Research.
For one thing, even if the uncertainty unleashed by the war in Ukraine were miraculously resolved overnight, the Federal Reserve’s increasingly hawkish stance on inflation should continue to create waves.
“If markets survive Putin, they’ll still have to deal with [Fed Chair Jerome] Powell,” writes Richard Saperstein, chief investment officer at Treasury Partners, a New York City wealth manager with $9 billion in assets under management.
“Even prior to Russia’s invasion of Ukraine, there were growing risks to the investment backdrop that had already precipitated increased market volatility.”
That said, volatility isn’t the same thing as returns.
Returns are what you get; volatility is how you get there.
One pernicious aspect of heightened volatility is that it feeds into investors’ unfortunate tendency to focus on short-term market noise at the expense of longer-term signals.
Buy-and-hold investors probably shouldn’t try this at home, but active or tactical investors and traders might want to try adding some quality, high-volatility stocks to their holdings.
To find the best stocks for the situation, we screened the S&P 500 for stocks with the highest betas.
To oversimplify a bit, beta measures how a stock moves relative to the S&P 500.
It’s a volatility metric, and something of a proxy for risk.
The S&P 500 has a beta of 1.0.
Any stock that trades with a beta greater than 1.0 can be said to be more volatile than the broader market.
In practice, that means it tends to outperform the benchmark index when stocks are rising, and underperform it when stocks are going down.
A stock with a beta of, say, 2.0 can kind of be thought of as twice as volatile as the S&P 500.
Be aware that beta is backward looking.
It measures how a stock has traded relative to the S&P 500 in the past, commonly over a one, two or five-year period.
For that reason, we screened the S&P 500 for stocks with the highest one-year betas, or most volatile names of the recent past.
We then narrowed down our list to high-volatility stocks with the strongest Buy recommendations from industry analysts.
Here’s how that process works.
S&P Global Market Intelligence surveys analysts’ stock calls and scores them on a five-point scale, where 1.0 equals a Strong Buy and 5.0 is a Strong Sell.
Any score equal to or below 2.5 means that analysts, on average, rate the stock at Buy.
The closer a score gets to 1.0, the stronger the consensus Buy recommendation.
Have a look at three S&P 500 stocks with the highest betas and strongest conviction Buy recommendations from Wall Street analysts.
- Nvidia (NVDA, $276.92), with a beta of 2.4, has been far more volatile than the broader market over the past 52 weeks.
- Little wonder there: The semiconductor stock is emblematic of the way investors ditched last year’s pricey growth darlings in favour of value names in 2022.
- NVDA outperformed the S&P 500 by a wide margin last year, but then seriously lagged the index for much of 2022.
- At its nadir, NVDA was off nearly 28% for the year-to-date as of March 14.
- It has since come roaring back to close its gap with the S&P 500, and now trails by only about a single percentage point.
- Analysts give the stock a consensus recommendation of Buy, with high conviction.
- Etsy (ETSY, $132.32) has traded as high as $307.75 over the past 52 weeks and as low as $109.38.
- Shares are down by more than a third for the year-to-date, but analysts say they’re set to reverse trend and deliver market-beating returns.
- The global e-commerce platform for jewelry, apparel, home décor and other crafts supplies get a consensus recommendation of Buy, with high conviction.
“As the leader in the niche market of artisanal goods, we believe Etsy has carved out a favourable competitive position with formidable barriers,” writes Stifel analyst Scott W. Devitt (Buy).
“The company is exiting a transition period where operations were streamlined, resources refocused and a number of initiatives implemented to reinvigorate growth.”
- KLA Corp. (KLAC, $366.44), like any company connected with the semiconductor industry, has been whipsawed around by the global chip shortage, supply chain snafus and geopolitical uncertainty.
- But KLAC continues to build on its industry-leading market share in process control and metrology, says Argus Research analyst Jim Kelleher (Buy).
“With demand strengthening and now exceeding pre-pandemic production levels in many markets, KLAC shares appear attractive at current levels,” the analyst writes.
The Street largely concurs, giving KLAC a consensus recommendation of Buy, with strong conviction.
Analysts forecast the company to generate average annual earnings per share growth of 16% over the next three to five years.
KLAC might offer investors a bumpy ride, but the potential for outperformance can’t be denied, bulls say.
Related stories: Volatility Happening All at Once After Starting Slowly