Fund managers like to avoid volatile shares. But get your entry point right, and you can make massive gains.
In the recent market rise, some shares have risen fast. However, these are often the same stocks that are likely to fall hard if the market goes into reverse. These are what investment statisticians call 'high beta' shares. A high-beta share is one whose movements have historically exaggerated the movement of the wider market: both up and down. Buying a high-beta share ahead of a market rally can deliver big returns. Time your entry wrong, however, and a market correction can result in heavy losses.
I trawled the market to find the largest companies with high betas. Remember that just because these have been high-beta shares in that past, it does not mean that they will demonstrate the same behaviour in the future.
|Company||Price (p)||Beta||Yield (%, historic)||P/E (historic)||Market cap (£m)|
|Barclays (LSE: BARC)||223||2.4||2.7||17.3||27,235|
|Royal Bank of Scotland (LSE: RBS)||267||2.4||0.0||N/A*||16,071|
|Kazakhmys (LSE: KAZ)||742||2.7||2.3||4.6||3,884|
|GKN (LSE: GKN)||228||2.2||2.6||12.7||3,709|
|Vedanta Resources (LSE: VED)||1,066||2.6||3.2||21.6||2,908|
|Travis Perkins (LSE: TPK)||1,077||2.3||1.9||11.5||2,632|
|Signet Jewelers (LSE: SIG)||3,090||2.1||0.4||13.4||2,500|
|Bank of Ireland (LSE: BKIR)||8||3.0||0.0||N/A*||2,365|
|Gulf Keystone Petroleum (LSE: GKP)||228||3.8||0.0||N/A*||1,596|
|Taylor Wimpey (LSE: TW)||55||2.6||0.4||26.3||1,779|
|Inchcape (LSE: INCH)||377||2.2||2.9||10.3||1,742|
|DS Smith (LSE: SMDS)||187||2.2||3.2||14.5||1,733|
|Cookson (LSE: CKSN)||618||2.6||3.5||9.6||1,721|
|Barratt Developments (LSE: BDEV)||169||2.3||0.0||21.2||1,648|
|Ashtead (LSE: AHT)||327||2.2||1.1||12.1||1,644|
* previously loss making
Four stood out in particular.
1) Vedanta Resources
Vedanta Resources frequently appears on lists of the cheapest large-cap shares around. They have become less cheap recently. In the last month, the shares have risen 13.5%. This means that the shares today trade at 7.8 times the consensus eps (earnings per share) forecast for 2013.
Unlike many companies in the resources sector, Vedanta has significant operations in both metals and energy. At the end of 2011, Vedanta acquired a majority stake in Cairn India at a cost of $8.7bn. This brought the famous Rajasthan oil fields into Vedanta's portfolio.
Around one third of Vedanta revenues come from copper. Zinc is 23% and iron ore is 12%; the balance is aluminium and power. Following the Cairn India acquisition, oil and gas will play a bigger role within the company.
Given how diversified Vedanta is, it is a surprise to see that the shares are so volatile. Vedanta has been paying a dividend for the last eight years. The payout has been rising since 2010, and another two years of dividend growth are expected.
2) Travis Perkins
Travis Perkins owns a group of builders' merchants and DIY stores. Wickes and Toolstation are two of the company's best known divisions.
Travis Perkins shares suffered badly in the financial crisis. At the very worst, shares in the company fell to less almost two pounds. They since advanced more than fourfold.
Frequently, a recovery of that magnitude takes place when a company is saved from the brink. However, Travis Perkins traded profitably throughout the downturn. Although the dividend was cancelled for 2009, it has since been reinstated and has been increasing fast.
An organisation like Travis Perkins will always be considered a geared play on the UK economy. While the shares have been volatile, the assumed risk is perhaps undeserved. Travis Perkins is expected to demonstrate growth from here. Consensus expectations are for the dividend to increase by more than 20% for the next two years. Earnings growth is forecast at 2.6% for 2012 and 10.1% for 2013.
3) Royal Bank of Scotland (RBS)
A majority of shares in RBS are owned by the UK taxpayer. This helps explain the share's volatility: investors are concerned that RBS may not be strong enough.
RBS recently announced plans to IPO its Direct Line insurance operations, and it is widely anticipated that private investors will have the opportunity to participate in the float. The price tag for the Direct Line division is currently undecided; however, a disposal could help RBS shares. First, a sale would turn a (risky) business asset into (safe) cash. Secondly, a disposal would likely be regarded as an important milestone in RBS' recovery.
At the interim stage, RBS reported a net asset value per share of 489p. RBS is expected to report a profit for 2012 and 2013 -- progress is clearly being made. To my mind, it doesn't seem right that the shares should trade at such a large discount to book value.
4) Barratt Developments
Barratt's recent final results revealed a company in recovery. Profit before tax increased 159%. Operating margins rose from 8.2% to 9.5%. Net debt was almost halved.
Much of this improvement will have come from the double-whammy of improved average house prices and an increase in sales volumes. In the 12 months to 30 June 2012, average selling prices rose 1.2%. While that may seem like a minor increase, it helped to deliver the 16% improvement in margins. Add to this the 14% increase in the number of homes sold and the reasons behind the recovery are clear.
House prices in the UK remain an economic bellwether. While eurozone concerns are (currently) receding, the UK economy remains in recession. Even if the economy does recover, a return to the boom years in the mortgage market remains some way off.
Management plans for Barratt to become a dividend payer again in 2013. The shares currently trade at 13.0 times the consensus estimate for 2013, falling to 9.6 times the 2014 estimate.
The returns from these high beta shares show how you can use the stock market to make big returns. If you would like to learn more about how investing can turbo-charge your wealth, check out the free Motley Fool report "10 Steps To Making A Million In The Market". Get this report now; it will be delivered to your inbox immediately.
He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
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> David owns shares in Royal Bank of Scotland.