Why High beta stocks provided more returns then high quality stocks?
Updated on 8 Aug 2016
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Beta is a measure of the sensitivity of stock returns compared to market returns. A beta value greater than one suggests the stock has a tendency to rise more than the benchmark index in a rising market and fall more when markets correct. Investors were earlier comfortable paying a steep premium for quality names as, amid market uncertainty, earnings visibility took precedence over valuations.
Things seem to have changed. Now, stocks such as Tata Steel, Larsen & Toubro, DLF, Hindalco, Vedanta, among others, are under the limelight. Metals stocks have fared particularly well during this rally. These stocks have performed despite concerns around Brexit and subdued earnings growth.
Quality refers to companies with robust fundamentals-high return on equity, zero or low leverage, healthy cash flow-and durable business models that provide healthy earnings visibility. Britannia, Sun Pharma, Havells India, Infosys were among the prominent quality stocks sought by investors a year ago. For more information about quality stocks please visit at top 10 quality stocks -
Let’s see how high beta and high quality stocks have performed in this year -2016
After a period of sustained weakness, frontline stocks forming the benchmark Nifty index have zoomed 24% from the February lows. This rally marks a conscious shift towards high beta stocks- stocks that are more volatile compared to the broader market-in sharp contrast to the earlier obsession with 'quality' stocks. Performance of strategy indices during the past six months reveals that the high beta strategy, as denoted by the NSE High Beta Index, has delivered 28% return during this period, more than double that clocked by Quality stocks-13%-as represented by the NSE Quality 30 index.
Please see the below chart
The expectation that an economic upturn will drive up earnings growth is leading investors to lap up high beta stocks, as these can provide huge returns in a sustained rally. Quality is being sacrificed for beta-led gains. While not all high beta names are bad, quality should be a necessary prerequisite while choosing stocks.
List of high beta stocks that have provided excellent returns
Suggests investors look at sectors where quality remains intact but where there is a degree of uncertainty. Quality IT firms, with strong balance sheet, high cash and zero leverage at moderate valuations are a good option as are two-wheeler companies and cash-rich PSU firms with a monopoly.
Among the high beta names, players in the road construction and cement space are good bets as they are likely to benefit from the infrastructure push.
Analysts are positive on NCC, LIC Housing Finance and IRB Infrastructure Developers. For those who want to stick to quality picks, Maruti Suzuki, Infosys and ITC still provide room for upside in the medium term