The concept of beta – which measures a stock’s volatility compared with the market as a whole – is an important one for equities.
So is the concept of equity-risk premium -- that's how much more return you should get if you invest in stocks instead of risk-free assets like Treasury securities. The equity-risk premium has soared 42% this year.
How do the two concepts relate to each other?
“In a rising equity-risk-premium environment, stocks with the highest betas should be hurt the most based on the capital-asset-pricing model,” Bank of America strategists wrote in a commentary.
That model depicts the relationship between risk and expected return for stocks.
So you may want to be cautious about loading up on stocks with high betas now.
Bank of America strategists offered a list of S&P 500 stocks with the highest five-year price betas as of May. Here are the top 10:
1. APA (APA), a shale oil producer. Beta: 4.13.
2. Caesars Entertainment (CZR), a casino company. Beta: 2.79.
3. Devon Energy (DVN), a shale oil producer. Beta: 2.61.
4. Marathon Oil (MRO), a shale oil producer. Beta: 2.59.
5. Norwegian Cruise Line (NCLH), a cruise company. Beta: 2.46.
6. Royal Caribbean (RCL), a cruise company. Beta: 2.39.
7. Penn National Gaming (PENN), a casino company. Beta: 2.34.
8. Halliburton (HAL), an oil-field services company. Beta: 2.31.
9. Wynn Resorts (WYNN), a casino company. Beta: 2.23.
10. Diamondback Energy (FANG), a shale oil producer. Beta: 2.20.
As you can see, oil and leisure/entertainment stocks are among the most volatile.
Morningstar’s Take on APA
Morningstar analyst Dave Meats assigns APA no moat and puts fair value for the stock at $35. It recently traded at $33.02.
APA has oil and natural gas assets in the U.S. and overseas. “The vast majority of its domestic production is derived from the Permian Basin,” Meats wrote in a commentary.
“This was a key growth engine for the company until 2020, when the coronavirus-related collapse in crude prices forced the company to dial back on drilling capital.
“Since then, production has declined due to lower investment, though management intends to grow its Permian output to prepandemic levels during 2022.”
Morningstar’s Take on Caesars Entertainment
Morningstar analyst Dan Wasiolek gives the company no moat and puts fair value for the stock at $100. That's more than twice recent trades above $42.
Caesars has done well with its acquisitions and now holds more than a 10% revenue share of the domestic casino gaming market, he wrote in a commentary.
“Despite this successful acquisition record, we don't believe Las Vegas and other U.S. gaming regions contribute to a moat for Caesars,” Wasiolek said.
“U.S. gaming demand is lower than in Asian regions like Macao and Singapore…. That said, Caesars' U.S. casinos are positioned to benefit from the multibillion-dollar sports betting and iGaming market.”
