440 words
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Understanding
Beta Ratings
by Michael Finley
651-644-4540
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If you read stock reports you are probably familiar with the word beta. The word is Greek, and it's about math, and that discourages many investors from learning more about betas. But it's not a difficult concept. A beta rating is simply the way Wall Street calculates the riskiness of a given stock, compared to the market as a whole.
A stock with a rating of exactly "1" has historically moved in lockstep with the market. A stock with a beta of "0" means the stock is rock-stable, and doesn't budge in value despite external conditions. A stock with a beta of "2" is the opposite, extremely volatile, and will increase or decrease in value if you even look at it cross-eyed.
Low-beta stocks usually include the large, stable, slow-growing blue-chip stocks like General Electric or utilities like Con Ed. High-beta stocks are often smaller companies, oriented more toward growth. Low-beta stocks are defensive; high-beta stocks are aggressive.
So: if you're an investor who can handle the ups and downs of a volatile stock, in hopes of seeing greater eventual appreciation, then you have the stomach for a high (above 1) beta. If you get fidgety when you stock drops in value for no other reason than that other stocks also did that day, then you should look for low (below 1) betas.
That sounds easy. The problem is, in your research, you may find more than one beta rating for stock you're interested in.
Take the case of Marion Laboratories, recently merged with Dow Chemical. It boasted four separate beta ratings, from four separate rating groups. Standard & Poors -- the most commonly cited beta, based on the "market standard" S&P500 -- rated it 1.11. But Value Line rated it higher, at 1.35, and Merrill Lynch and Microscan both rated it lower, at 0.96 and 0.94, respectively.
Why the difference? Ratings vary depending upon the market index used, and the historical range each rating covers.
Basically, even when beta ratings differ, they don't differ much. You'll never see a company cited by one rating system as a 0.5 (when the market goes up or down 10% it goes up or down 5%) and by another as 1.75 (up or down 175% as much as the market). But they will differ a little.
The important thing when using betas is to know your own level of risk aversion, and to match your investments to that. Together with other essential stock measures -- stock price, price-to-earnings (P/E) ratio, and dividend and stock ratings -- they are the best research tools an investor has.