Despite the increasing worries about inflation and high interest rates, the Nasdaq seems to have bucked the trend by bouncing off its lows and offering more than 20% returns since its late December 2022 dump. This presents a golden chance for opportunistic investors who are looking for ways to get a greater return on their trades. One way they’re doing this is by trading high beta tech stocks that tend to outperform the major indices. As high beta stocks have a higher volatility than the market overall, they can potentially generate more profit in times of a bull market. Keen on learning how to trade these highly variable stocks? Read on as we cover the basics of high beta stocks and list examples of such stocks that are currently being traded by retail traders.
What Is Beta?
Beta is part of the Capital Asset Pricing Model (CAPM) and measures the volatility of a specific security or portfolio compared to the market as a whole. Stocks with betas higher than 1.0 can be interpreted as more volatile than the benchmark index, which is the S&P 500.
For those new to financial modelling, CAPM is a popular valuation method used investors use to evaluate if a stock is fairly valued. Put simply, it can estimate whether the stock's current price is aligned with its likely return. As part of CAPM, beta plays a key part in determining the overall risk undertaken when investing in a particular security. Calculating beta is done using regression analysis, where the returns of the security are measured against the benchmark over a specified period.
The key benefit of using beta is that it helps investors assess the risk of investing in any security by tying said risk to a quantifiable number. This lets investors weigh their options when choosing between an early-stage growth stock and a mature dividend stock.
What Are High Beta Stocks?
High beta stocks are described as those with a beta of greater than 1.0, implying that they’re more volatile than the benchmark index. As such, they should be approached with caution by investors due to the risk associated with them. However, if managed correctly, high beta stocks can generate higher returns during a bull market. This ultimately makes them ideal for opportunistic traders seeking to take advantage of the stock's adverse price movements.
Let's illustrate the benefits of trading high beta stocks with an example. Year-to-date (YTD), the S&P 500 benchmark index has produced a return of 6.47%. In comparison, stocks like Coinbase (NASDAQ: COIN) and Upstart Holdings (NASDAQ: UPST) that have a beta of more than 2 have amassed returns of 85.91% and 20.69% respectively. It's this difference in volatility that attracts traders who want to take advantage of the potential for explosive returns when compared to the benchmark index.
Now that you're caught up to speed with regards to beta, if you too are keen on exploring the realm of high beta tech stocks during this Nasdaq bull market, here are some examples that you can possibly consider adding to your watchlist.
Examples of High Beta Stocks
From crypto exchanges to pandemic darlings, these are some examples of high beta stocks that have beta values greater than 2, which imply high volatility during these turbulent times. Do take note that the beta value calculated for each of these high beta stocks are based on a one year basis.
Beta value = 2.80
Despite being a fraction of its initial IPO price, Coinbase (Nasdaq: COIN) has shown no signs of slowing with this year's Nasdaq bull market rally. While its YTD returns of 85.91% pale in comparison to the returns achieved by bitcoin, COIN stock's recent price action suggests that it still has room to run. Up-to-date investors and traders might recall Coinbase making headlines for regulatory runins with the SEC. This increased scrutiny from the SEC is largely due to Coinbase's insider trading scandal and regulatory concerns with regards to Coinbase's crypto product offerings. Despite these headwinds, long-term investors like Ark Invest's Cathie Wood remain bullish for the future value of Coinbase as a mainstay in the centralised crypto exchange industry.
Unity Software Inc.
Beta value = 2.47
As one of the high beta tech stocks that hugely benefitted from the pandemic gaming boom and interest in the metaverse, Unity Software (NYSE: U) managed to almost triple its original IPO price at its all-time high towards the tail end of 2021. Since then, things haven't been going too well for the video game software development company. As an up and coming growth stock, Unity Software has been burning through copious amounts of capital. This caused U stock prices to tumble as inflation struck the market and the Fed aggressively hiked its interest rates. Despite Unity Software's apparent lack of profitability and YTD returns of 0.21%, bullish investors are looking upon two catalysts to reignite the rally for U stock. Firstly, they're hoping for the gaming industry to recover from its slump after a strong showing during the pandemic. Secondly, U investors are considering the potential of the Unity metaverse once the harsh macroeconomic conditions blow over and venture capitalists are keen to take on risk through investing in metaverse platforms again.
MARATHON DIGITAL HOLDINGS INC.
Beta value = 2.29
It's no surprise that a crypto related company takes a spot in our list as one of the higher beta tech stocks. As one of the larger players in the crypto mining space, Marathon Digital (Nasdaq: MARA) has shown the most volatility in recent times thanks to the 2023 Q1 bitcoin rally. Since bitcoin mining is Marathon Digital's main revenue driver, MARA stock has risen exponentially as speculators jump on board in expectations of soaring revenue numbers. This has allowed MARA to deliver YTD returns of 161.11%. With BTC prices climbing higher and Marathon Digital breaking bitcoin mining records of 75.89 BTC within 24 hours, traders have good reason to be confident in the future of crypto mining as they continue speculating on this high beta tech stock.
Understanding the Risks of Trading High Beta Stocks
While they admittedly provide the most potential upside opportunity, high beta stocks also bear some of the greatest risks. With heightened volatility comes increased risk. This is especially the case with the stocks listed above as COIN, MARA and U are more than 85% down from their all-time highs. This fact highlights one of the biggest dangers that arise when trading high beta stocks is that its price movements can be erratic and unpredictable. While it's true that these high beta tech stocks rise much faster than the average stock during a bull market, they might also fall just as quickly once their rally begins to fizzle out. This means that your entry and exit decisions will be greatly influential on how successful you'll be with trading higher-beta stocks.
Another issue with investing in volatile markets like this is the risk of overtrading. You might find yourself making too many trades in a short span of time, or worse - being tempted to go all in on a single stock. This is risky business, and often leads to losses which could have been avoided with the proper research and risk mitigation. Therefore, inexperienced investors and traders are advised to consider its implications before jumping into high beta stocks without any understanding.
The Bottom Line
High beta tech stocks represent an attractive yet volatile investment option in the current Nasdaq bull market. While these types of stocks give investors a chance to earn higher returns, they should be aware of the risks associated with these high beta stocks as well. With their elevated volatility, these stocks can be very risky and may not be suitable for all types of investors. Before making any investments in such companies, it is ultimately key to do your own research and understand the underlying technology behind the stock you are investing in. By doing so, you can gain insight into how much risk you are willing to take on when trading high beta tech stocks during this Nasdaq bull market.