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Investors always want great returns with minimal risk. One way that stock analysts measure risk is by looking at what's known as beta values, with higher betas representing more volatile stocks. But if high-beta stocks are risky and low-beta stocks are safer, could negative-beta stocks be the best deal of all?
A brief look at beta
Understanding beta involves breaking down the component parts of a stock's return. One part, called alpha, represents the return that's completely independent of the stock market. The other, beta, shows the extent to which the stock's return is correlated to the stock market's overall return. As a result, high-beta stocks tend to produce bigger gains when stocks rise -- and bigger losses when they fall -- than their low-beta counterparts.
Negative-beta stocks, however, have odd behavior because they tend to move in the direction opposite the market's movement. Most frequently, discussions of negative beta will center around bonds, because bond investments tend to rise when stocks fall and vice versa. For individual stocks, though, negative betas are fairly rare.
But out of curiosity, I turned up some of the few negative-beta stocks out there. Here's a quick look.
Arena Pharmaceuticals (NASDAQ: ARNA ) , beta = -0.32
Arena is a small drugmaker with a blockbuster new product: anti-obesity drug Belviq. After long waits to get FDA approval, Arena and competitor VIVUS (NASDAQ: VVUS ) both successfully got drugs on the market, the first to fight obesity in years.
Here, the negative beta doesn't represent any sort of anti-market sentiment. Rather, it simply reflects the fact that Arena's movements are determined much more by company-specific news like Belviq's sales than by overall market action. Investors shouldn't look at Arena as being low-risk just because of its negative beta.
Ferrellgas Partners (NYSE: FGP ) , beta = -0.01
Ferrellgas is a propane supplier that's best known for its Blue Rhino refillable gas tanks for grills and other household uses. Given the fairly constant need for its products, Ferrellgas has seen solid demand, and as a master limited partnership, it pays a healthy dividend yield to investors.
Recession-resistant businesses like Ferrellgas often have little or no correlation to the market. In this case, a negative beta just a hair under 0 doesn't have any more significance than a positive 0.01 beta would. Ferrellgas will move with gas prices more than with the broad market.
Agnico-Eagle Mines (NYSE: AEM ) , beta = -0.33
As a mining company, Agnico-Eagle produces gold, and lately, it has had some big success. The company has had to boost its production estimates for the full 2012 year twice, with its latest guidance pointing to more than 1 million ounces of gold production. With cash costs on the decline, Agnico-Eagle has posted a strong advance recently.
Gold and other precious-metals producers often move against the market, because gold often attracts safe-haven money when stocks start to decline. That relationship has fallen lately, which explains why the negative beta is relatively low, but many investors use gold miners like Agnico-Eagle as hedges to diversify their portfolio exposure.
Dr Pepper Snapple (NYSE: DPS ) , beta = -0.11
As a distant third in the soft-drink wars, Dr Pepper is understandably insulated from the moves of the overall market. With its own niche from its unique namesake beverage, Dr Pepper has found ways to sustain its business regardless of the strategies of its larger competitors.
Big stocks tend to be included in index funds that increase correlation, but smaller companies like Dr Pepper often avoid that effect. Dr Pepper is a relatively safe stock with a devoted customer base that sees the product as a necessity, and that should support demand going forward.
The right way to invest in negative-beta stocks
The key to investing in these unusual stocks is not to draw generalizations based on beta. Instead, you have to look at each stock to determine why the beta is negative, and then decide if it's a good fit for your portfolio.
Among these negative-beta stocks, Arena arguably has the most potential, as the potential market for obesity drugs is massive. To learn more about Arena and its chief competitor, grab your copies of our premium research reports on Arena Pharmaceuticals and VIVUS today. In the reports, our senior biotech analyst, Brian Orelli, Ph.D., breaks down each company's strengths and weaknesses, and explains the critical issues you need to know about. News in this space moves fast, so both reports come with a full year of updates. Click now for exclusive information on Arena and VIVUS.