Using a market statistics package, I searched for the shares whose price movements have previously exaggerated the market’s by the most. This produces a list of shares that statistics show would be most likely to rise furthest should the market rise.
These are known as high-beta shares. There are two important things to note. First, just because a share has been high beta in the past does not mean it will be in the future. Second, just as these shares are expected to rise most in a bull market, statistics also suggest they would fall hardest if the market went into a decline.
Royal Bank of Scotland
Weekend press reported that the government looks set to scrap plans to split Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) into a ‘good’ bank and a ‘bad’ bank. Many analysts had feared that RBS might suffer this fate and have been discounting the shares accordingly.
RBS management has been rapidly reducing the size of RBS’s ‘bad’ bank. The long-feared prospect of damaging government interference at RBS is receding.
The significant share price discount to book value and favourable trading outlook leave RBS shares well poised to advance sharply in any market rise.
The shares are up 21% in the last six months while the FTSE is just 3% ahead. I expect outperformance to continue.
Legal & General
As a provider of managed investment funds, Legal & General (LSE: LGEN) will often be regarded as a geared play on the stock markets. That is because such businesses enjoy a double-whammy of increased business and high fees when markets rise. In a market setback, that process reverses.
Legal & General shares have risen 38% so far this year versus a 12% rise for the FTSE 100. Laying the share price graph of one over the other shows just how Legal & General has amplified the ups and downs of the blue-chip index.
The shares today trade on 13 times forecast earnings for 2013 and offer a prospective yield of 4.5%. That still leaves room for further rises.
Engineering firm GKN (LSE: GKN) is a big supplier to the world’s highly cyclical automotive market. As such, its shares are frequently bought/sold based on people’s expectations for the global economy. These swings lead to the shares carrying a high beta. This means that the shares suffer large falls in market declines and enjoying stunning rises during rallies.
This status seems to be borne out in the company’s profit record over the last five years. GKN reported losses for 2008 and 2009 before returning to big profits in 2010.
The company is forecast to report earnings per share for the year of 26.4p and pay a dividend of 7.8p. At today’s (five-year high) share price, that equates to a P/E of 13.6, with a prospective yield of 2.2%.
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> David owns shares in Royal Bank of Scotland but none of the other companies mentioned.