What is BETA Screener?
The beta idicator is used to understand if a stock moves in the same direction of the benchmark.
It provides insights about how volatile a stock is relative to the benchmark and how much risk a stock is adding to a portfolio.
Risk is always related to the potential for greater returns.
Let's consider the S&P500 (SP:SPX) and it's top 10 components by market cap:
NASDAQ:AAPL -> Apple (AAPL): 7.14%
NASDAQ:MSFT -> Microsoft (MSFT): 6.1%
NASDAQ:AMZN -> Amazon (AMZN): 3.8%
NASDAQ:TSLA -> Tesla (TSLA): 2.5%
NASDAQ:GOOGL -> Alphabet Class A (GOOGL): 2.2%
NASDAQ:GOOG -> Alphabet Class C (GOOG): 2.1%
NASDAQ:NVDA -> NVIDIA Corporation (NVDA): 1.8%
NYSE:BRK.B -> Berkshire Hathaway Class B (BRK.B): 1.7%
NASDAQ:FB -> Meta (FB), formerly Facebook, Class A: 1.4%
NYSE:UNH -> UnitedHealth Group (UNH): 1.2%
we will see how each individual stock contribute to the value of the S&P500 used as benchmark, in terms of volatility and correlation.
We can dive into the indicator and isolate the top 2 components:
NASDAQ:AAPL -> Red line
NASDAQ:MSFT -> Blu line
and analyse the period from 28/09/2021 to 08/11/2021.
I chose that period because is when MSFT crosses the 1 line in the beta indicator, meaning that the asset is becoming more volatile compared to the benchmark. Infact the BETA indicator value for MSFT is 1.4 until 26/10/2021 and then ramps up to 3.2.
We can notice that catching the perfect local bottom and local top between that period in the S&P500 had a return of 10,31%.
If we analyze Microsoft in the same period, it had a return of 21%.
Meaning that an higher BETA will result in more risk and greater returns.
When the MSFT BETA value goes from 1.4 to 3.2, we can notice an impulse to the upside in both the indicator and the price and this higher volatility allow us to catch an extra 10% compared to the benchmark.
If we analyze Apple in the same period, it had a return of 10,79% that is almost the same of the S&P500 infact it is obvious from the BETA indicator that it's value is close to 1 meaning there is less volatility.
If we want to go further with our story we can analize what appened immediatly after that period, from 08/11/2021 to 15/12/2021 that is exactly when AAPL become to be less volatile and inversely correlated.
We can notice how the red line crosses the 0 line in the BETA indicator meanwhile the blue line is exactly on the 1 value.
From this analysis moving the capital from S&P 500 to MSFT and then to AAPL would had a return of an extra 23% represented in the green box in the middle of the picture.
This assumption are particularly true in trending markets.
In short, analyzing how the components of a composite index are moving in the market can give great insights:
Beta Value = 1: it indicates that its price activity is strongly correlated with the market. A stock with a beta of 1.0 has systematic risk.
Beta Value > 1: indicates that the security's price is theoretically more volatile than the market.
Beta Value < 1: means that the security is theoretically less volatile than the market.
Beta Value < 0: means that the stock is inversely correlated to the market benchmark.
One step further.
Adding Tesla, yellow line, to the BETA indicator it is clearly visible that it has an higher value, 12. Considering almost the same period, from 18/10/2021 to 08/10/2021 and as before is where the yellow line crosses the orange line rapresenting the 1 value as benchmark, an higher value means higher returns and risks , indeed there is a gain of 45%.