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.
Lloyds Banking (LSE: LLOY)(NYSE: LYG.US) shares have soared as the UK economy has recovered. With the FTSE 100 index up 12.3% so far in 2013, Lloyds shares are 60% ahead.
That rise has stalled recently, coinciding with the UK government beginning to sell down its stake in the bailed-out bank. That shouldn’t come as a surprise. The government has already shown that it is willing to sell Lloyds shares at 75p. Given that almost one third of the stock still remains on the government’s books, it is unlikely that large buyers will be keen to buy significantly higher in the market.
Expectations are growing for Lloyds to start paying a significant dividend in 2014.
The bank is forecast to report earnings per share (EPS) of 6.7p next year, putting the shares on a 2014 P/E of 11.5.
Shares in Barclays (LSE: BARC)(NYSE: BCS.US) have had a tricky 2013. In September, the company was forced to raise funds by its overseer, the Prudential Regulation Authority. This knocked the shares, which had been trading more than 10% higher than they do today.
In my experience, markets soon bounce back from bad news, valuing companies on their prospects, not their past. Fortunately for shareholders, Barclays’ prospects are good.
The consensus analyst estimate is for Barclays to report EPS of 31.0p for 2014. A dividend of 10.7p is also expected. At today’s price, that puts Barclays shares on a 2014 P/E of 9.0, with an expected yield of 3.9%.
Shares in broadcaster ITV (LSE: ITV) have had a great 2013, rising 85.5% since the beginning of the year. As most of ITV’s revenue comes from selling advertising slots, business confidence can have a huge effect on the company’s profits. So, when economic worries cause markets to fall, ITV shares can suffer badly. When confidence returns, profit expectations rise. The result is that ITV is a high-beta share.
The company’s most recent results revealed an 11% increase in revenues from ITV Studios and a 19% rise in sales through online, interactive and pay services.
Brokers are forecasting EPS of 10.6p this year, increasing to 11.9p in 2014. The dividend is expected to rise fast, hitting 4.45p by 2014. At today’s price, that puts the shares on a 2014 P/E of 16.4, with a forecast yield of 2.3%.
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> David owns shares in Barclays but none of the other companies mentioned.