Why Not All Momentum Stocks Are High-Beta

You would think Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOGL) are high-beta stocks -- but you'd be wrong

Adam Warner

Jul 22, 2015 at 9:17 AM

Momentum is kind of an overused topic in sports. A three-run homer is way more important for the actual three runs it produces than some sort of potential future psychological impact. Ditto for a pick-six in football, a hockey goal, et. al.

But in stocks? Hey, momentum is pretty real. And the following hot names have done quite well this year, according to Bloomberg:

"Stick with your winners, goes an old Wall Street adage -- advice that is working better now than almost any time in the last quarter century.

"Momentum stocks, or shares with the most price appreciation in the last two to 12 months, are rising three times as fast as the Standard & Poor's 500 Index in 2015, on par with the best years ever recorded. In a market stuck in the tightest trading range ever measured, industries like biotech and online retailers are posting gains of 30 percent or more.

"Investors are drawing greater distinctions among companies when S&P 500 profit growth is forecast to slow to 1 percent, down from an annual rate of 15 percent since 2009. Health-care and makers of non-essential consumer goods, whose earnings are expected by analysts to rise about 11 percent this year, are in, while energy producers are out. "

Here's an odd dichotomy, though. You'd think we would classify these very same momentum names as "high beta," right? Well, there's an exchange-traded fund (ETF) that tracks the 100 highest-beta names in the S&P 500 Index (SPX) -- the PowerShares S&P 500 High Beta Portfolio (SPHB). And here's how SPHB looks vs. the S&P this year:

150722Warner

At best, SPHB tracked the S&P for the first half of the year, but it's lagged this last rally quite badly and is actually down in 2015. Well, here's why. Stocks like Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOGL) are often momentum names, and they sound like high-beta names -- but they're actually not. That's because they're so big that, by definition, they carry beta near to market beta. They're not in the index.

Meanwhile, Netflix, Inc. (NASDAQ:NFLX) is in SPHB, but it's only 1.35% of it, so it can't do heavy lifting like AAPL and GOOGL can. So, what does count as high-beta right now? Industrials and energy take up nearly 20% each, and that's not exactly the center of the current rally.

All in all, it's kind of an odd confluence. You have a rally clearly led by momentum in tech names. If you knew that, you would surely assume that high beta would prevail, yet that's clearly the opposite of true.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research

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