Mid-October is one of the few times when high-beta stocks perform as expected

Research shows the risk of high-beta stocks can pay off - but only during the first busy week of earnings season.

Coming soon is one of the only weeks of the year in which aggressive traders should bet that the highest-beta stocks will beat the lowest ones.

High-beta stocks, of course, are those that tend to gain the most when the market rises, and lose the most when it falls. Low-beta stocks, in contrast, tend to move the least when the overall market rises or falls.

According to academia's capital-asset pricing model (CAPM), high-beta stocks, on average, should outperform low-beta stocks at any time of the year, as compensation for their higher risk.

The real world doesn't conform to this theory, however, according to a study conducted by Terry Marsh, an emeritus finance professor at the University of California, Berkeley, and Kam Fong Chan, a professor of finance at the University of Western Australia. As you can see from the above chart, they found that high-beta stocks, on average, conform to the CAPM during just the first busy week of earnings season. In contrast, during all other weeks, on average, there is no statistically significant relationship between beta and return.

The investment implication: Only during the first busy week of earnings season will you earn a return, on average, for incurring the risk of high-beta stocks. For all other weeks, you should bet against beta - investing in low-beta stocks regardless of your risk preference.

That first busy week of earnings season is typically the second week after the end of the quarter, which is when the first sizeable group of large-cap companies reports results. For this year's third quarter, this week is Oct. 12-16; large-cap companies expected to report their earnings that week include JPMorgan Chase (JPM), UnitedHealth Group (UNH), Goldman Sachs Group (GS), Citigroup $(CUL3)$, Morgan Stanley (MS) and Taiwan Semiconductor Manufacturing (TSM).

The reason for the positive correlation between beta and return during the first busy week of an earnings season, according to the study's authors, is that this is when investors learn more about the health of the economy than in all the other weeks of the quarter combined. The profits of the large caps that report during this week are dependent on many other sectors and industries throughout the economy, so it's an especially good sign when these companies report impressive results, and vice versa. That's why high- and low-beta stocks perform as the CAPM predicts during those weeks.

In contrast, in the other weeks of the quarter, company news affords us much less insight about the health of the overall economy. That's why the beta-return relationship largely disappears during these other weeks.

Note carefully that high-beta stocks are not an automatic bet to perform well in the first busy week of this upcoming earnings season. They likely will if the earnings reported in that week are especially positive. But, as predicted by the CAPM, they will perform especially poorly if the earnings reported during that week turn out to be unexpectedly poor.

That's just another way of saying that high-beta stocks are risky. If you incur that risk and the market does well, you most likely will be handsomely rewarded for incurring that risk. The point of this recent academic study is that only during this one week per quarter should you even entertain betting on high-beta stocks.

For the aggressive traders among you, below are the 20 highest-beta stocks among those recommended by at least two of the investment newsletters monitored by my performance-monitoring firm. They are listed in descending beta order.

Don't forget that this list is for aggressive short-term traders only. Other than in mid-October, there appears to be no reason to incur these stocks' higher risk.

 
Ticker  Stock             Beta 
AFRM    Affirm Holdings   3.81 
NVDA    Nvidia            2.22 
LRCX    Lam Research      1.86 
FSLR    First Solar       1.78 
AVGO    Broadcom          1.47 
AMZN    Amazon.com        1.45 
DIS     Walt Disney       1.42 
ADBE    Adobe             1.40 
DHI     D.R. Horton       1.35 
FDX     FedEx             1.29 
GS      Goldman Sachs     1.28 
LZB     La-Z-Boy          1.25 
GEN     Gen Digital       1.22 
UFPI    UFP Industries    1.22 
META    Meta Platforms    1.22 
BAC     Bank of America   1.21 
MS      Morgan Stanley    1.20 
GOOG    Alphabet          1.20 
ENS     EnerSys           1.19 
DECK    Deckers Outdoor   1.12 

Source: LSEG, Hulbert Ratings

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert