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As the saying goes sometimes, you want to put the pedal to the metal.
When the stock market is in a strong rally phase and technology stocks are on the move, that is often a good time for investors to become more aggressive. One way to do that is to take into consideration “Beta” when picking a stock.
To those not comfortable with a statistical figure such as “Beta,” it may seem a bit mysterious. However, the concept and use of “Beta” is simple. eSignal subscribers have it at their fingertips. On each eSignal quote page, you can set the heading area to show the value of “Beta.”
In simple terms, “Beta” is a measure of a company's common stock price volatility relative to the stock market (S&P 500). So, a stock such as IBM has a beta of 1.58 versus the S&P 500, which is always 1.0. That means that IBM is 58% more volatile than the S&P.
In precise technical terms, “Beta” is the slope of the 60-month regression line of the percentage price change of a stock relative to the percentage price change of the S&P 500.
The beta value for a stock is not used unless there is 24 months’ worth of prices available. So, when using eSignal’s quote page and listing “Beta”, you will find it does not come up for certain stocks. Also, in some cases, “Beta” will be less than 1.0. That means the stock is less volatile than the S&P.
So, how do you put this little baby -- “Beta” -- to work?
Well, you must remember that “Beta” is not a primary technical tool to pick stocks. The first step is basic stock selection. That means an analysis of a company’s fundamentals and technicals. Company fundamentals include earnings and sales growth, and technicals include the trend of the stock and its leadership quality, or relative strength. Additionally, you can look at other facts, such as group or sector strength.
Sometimes, you can find several stocks you like. One way to choose from among them would be to go with the one with the higher beta with the hope of getting more “bang for the buck.”
Let’s take a look at three tech issues as an example.
First Choice: Marvel Technology Corp.
Marvel Technology Corp. (MRVL) has a high beta of 4.34 (see table). Marvel makes signal processing integrated circuits for the networking market. Earnings for the fiscal year ending January 30, 2006 should surge 53 percent.
he stock broke out from a base in early November at 48. It is now trading at 50 and trending higher. The high beta of 4.34 means, all things being equal, the stock should do extremely well if the market (S&P 500) heads higher. It is a very aggressive tech play.
Second Choice: Powerwave Technologies Inc.
The low-priced Powerwave Technologies Inc. (PWAV) has a beta of 3.38. It is a less aggressive play than Marvel. PWAV looks good too. The stock is at $12.71 and is poised to break out from a base at $13.20. It is in a solid uptrend too.
Powerwave makes amplifiers and other equipment used to set up cellular transmission stations. This year, profits should soar 600 percent to 49 cents a share from 7 cents a year ago. Projecting out to 2006, analysts see net climbing 35 percent to 66 cents a share.
Third Choice: Hewlett-Packard Co.
A third pick would be the Dow Blue Chip stock, Hewlett-Packard Co. (HPQ). HP is the big maker of computers and peripheral equipment. HP’s beta is 1.92. That is higher than the S&P 500’s beta of 1.0. However, it is well below Marvel and Powerwave. So, HP would be the least aggressive play of the three tech choices.
HP’s stock is acting very well having climbed from 20 earlier this year to 28. It is in an eight-week base and needs to get to 29 to break out. Technically, HP is set up very nicely to move higher. Earnings for the fiscal year ending October 30, 2005 and for the following fiscal year should both be up 17 percent.
Depending on the risk you want to take, Marvel’s beta at 4.34 would be the riskiest of the three but could show the most reward. The next riskiest would be Powerwave at 3.38 while Hewlett-Packard at 1.92 would be the least risky and probably less rewarding of the three.
You should remember that “Beta” is strictly a technical figure derived from the past price performance of a stock. A stock’s beta could change in coming months. Also, it has nothing to do with the fundamentals of a company.
For individual investors, “Beta” should fit one’s personality. If you are aggressive and willing to ride with the ups and downs, a high beta play could be for you. However, if you are very conservative, a high beta stock could be upsetting. So, your choice would be to go with something less volatile. In any case, it would be a good idea for every eSignal user to check the beta of a stock before making an investment.
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