Beta is a great financial ratio to quickly assess a stock’s risk and volatility, but can a stock have a negative beta? Yes, it can, and in this article, we will analyze how a negative beta can impact a stock’s performance, and what it tells investors about its future risk and volatility.
Do any stocks have a negative beta?
Although it is highly uncommon for a stock to have a negative beta, it is possible. There are a few stocks or situations where a stock can get a negative beta. For example, if the stock market has gone up over the last 3 years, and the stock kept going down the stock could have a negative beta.
Additionally, stocks that perform well during market crashes can also have a negative beta.
What does it mean when a stock has a negative beta?
A stock with a negative beta means that it has the opposite movement of the broader market. Negative beta stocks are nothing more than the complete opposite of high beta stocks.
For example, a stock with a beta of -1, means that on average when the stock market goes up by 1% the stock is expected to decline by 1%.
Conversely, if the stock market goes down by 1%, the stock is expected to go up by 1% also.
Should you invest in a negative beta stock?
Investors should avoid stocks with a negative beta to hold for a long time because on average they are expected to move against the market, and historically the market always goes up. Therefore holding a large percentage of your investment portfolio in negative beta stocks, could mean that your long-term returns could be negative.
However, despite the risks, negative beta stocks can have a place in your portfolio as a hedge against market risk and volatility. They can provide safety, and balance out the performance of your portfolio during a downturn. This is one of the main advantages of negative beta stocks, and why some investors consider adding them to your portfolio.
Types of negative beta stocks
While there are several stocks that have a negative beta for a number of reasons, they are usually categorized in the following way:
Stocks that have underperformed the market, or have even declined over the last 3 to 5 years, can have a negative beta. Situations where a company is struggling, and the stock continuously declines are usually stocks with a negative beta.
This type of stock can be an interesting investment opportunity, following a contrarian and deep value approach. While some investors choose to buy stocks with a good performance, others wait to buy deeply undervalued stocks that are about to turn around.
Underperforming stocks in some cases are overvalued companies that decline over a span of a few years.
It is also common for companies with losses to underperform the market, and so some of these companies can have a negative beta. An underperforming company can quickly become unprofitable, and if the company’s losses continue over a few years, it is only natural that the stock performance reflects that.
Some stocks actually have a negative beta, due to the industry they are in. These stocks tend to perform better during a market downturn, and for that reason, they have a negative beta. An example is Virtu Financial (VIRT), which is a market maker. Their profits are directly dependent on the volume of shares traded in US markets. Whenever the market collapses, the traded volumes increase and Virtu tends to have higher earnings.
Therefore, the stock currently has a negative beta, as it is common for it to go up while the market is going down. As investors anticipate good earnings and financial performance driven by a market crash.
It is also common for biotech stocks to underperform the market for a long time, and this is why some of these stocks have a negative beta. Some biotech stocks can underperform the market for years until they finally see a big jump. They are usually a high-risk investment, and for that reason, some naturally go down as the market moves higher.
How to find negative beta stocks
The simplest way to find negative beta stocks is by using a stock screener. This allows you to research and filter stocks based on certain criteria. If you are looking for a stock to hedge your portfolio you might choose to screen for stocks with negative beta that are profitable, while if you are looking for a turnaround deep value stock you might choose to look at a negative beta stock with a good price-to-book.
While it is extremely rare for a stock to have a negative beta, it is certainly possible. While these companies might not be the best to invest in for a long period of time, due to their underperformance in the broader market, they can have a place in your portfolio. As they can easily balance those negative days, and reduce the volatility and risk of your investments.