LONDON -- Some shares soar when the market inches ahead. The same shares often tumble when the market takes a step back. These are the shares fund managers like to call "high-beta" stocks.
A share's beta is a statistical measure of the returns it produces versus the movement of the wider market. A share with a beta higher than one has been more volatile than the market. For a company with a beta of 1.5, its shares have historically been 50% more volatile than the market. This means that in the past, a 10% advance in the market would (on average) be matched by a 15% rise in the company's share price.
Companies traditionally considered "defensives" (such as utilities) usually have a low beta. Shares whose futures are subject to intense speculation often have high betas.
Fund managers like to use the beta statistic to measure the expected volatility of their portfolios. Be aware, however, that the beta is just a historical statistical measure of a company's share price versus the market. Beta is not fixed and can change with time. The long-term movement of a company's share price is driven by the performance of the business.
I've trawled the market to find the largest companies with a beta of more than 2.2. (A higher beta resulted in a less diverse set of results.) For income investors, some research on the sustainability of the dividends forecast will be required.
Market Capitalization (billions of pounds)
Royal Bank of Scotland (NYS: RBS)
Barclays (NYS: BCS)
Kazakhmys (ISE: KAZ.L)
Gulf Keystone Petroleum
In the three months from late November 2011, the FTSE 100 (INDEX: ^FTSE) advanced 15.5%. The above shares rose, on average, 66%. Since then, the FTSE 100 has lost 10%, while the stocks above are down 30%.
I've picked out three shares that might be worthy of further research.
Kazakhmys is the world's 11th-largest copper supplier. The company's operations are centred in Kazakhstan.
The price of copper is perhaps the financial markets' best indicator of confidence in the global economy. This means Kazakhmys' share price can demonstrate large moves as the value of copper changes. Today, the company's share price is almost three times the price it was at the beginning of 2009, but less than half the price it traded at in early 2008.
The company's profitability has followed a similar path. Earnings for 2011 were more than double the 2009 figure. Despite this volatility, Kazakhmys remained profitable throughout the worst of the financial crisis. Consensus estimates are for earnings at Kazakhmys to fall for the next two years. Today the shares trade at just 4.8 times forecasts for 2012. For such a large, consistently profitable company, this looks rather mean. Given past share-price movements, it is easy to imagine the shares bouncing back strongly if economic sentiment improves.
To flourish, homebuilders need a growing economy, confident consumers, and banks that are willing to lend to homebuyers. Recent economic conditions have been the exact opposite.
Before the credit crunch, shares in Taylor Wimpey were over 3 pounds each. Today they stand at 42 pence. Back in 2007, Taylor Wimpey sold nearly 15,000 homes at an average price of 191,000 pounds. Last year, Taylor Wimpey sold a total of 10,180 homes. These made an average price of 171,000 pounds.
Homebuilding is a geared play on the price of houses, so it should be no surprise to see a homebuilder's share price be so volatile today; so far this year, the company's shares have ranged between 37 pence and 52 pence.
Taylor Wimpey is expected to remain profitable and dividend-paying. Surprisingly for a high-beta stock, debts are reasonable at 117 million pounds. The shares trade on a forward price-to-earnings ratio of 12.4 times consensus estimates for 2012.
While any prolonged economic downturn would be bad for Taylor Wimpey, house prices have been resilient over the last five years. Taylor Wimpey's recent history demonstrates how the shares could bounce significantly if conditions improve in coming months.
Unlike most of the blue-chip, high-beta stocks you can buy today, Cookson shares are ahead this year.
Cookson is a diversified industrial business. As such, its shares would be expected to suffer in times such as these. However, the shares are up almost 50% in the last six months. When the FTSE 100 rose by 20% between October and the middle of March, Cookson shares advanced more than 60%.
In this period, an activist investment fund accumulated a large stake in Cookson. This led to speculation that the company might be broken up. Cookson also sold its American precious-metals business. This unit was bought by Berkshire Hathaway, the company controlled by wonder-investor Warren Buffett.
The Cookson example demonstrates how a company can end up with a high beta that might not be maintained. Cookson's strong share-price run was caused by decisions being taken by a small number of external investors, not the market in general.
It may be unwise to expect Cookson's future price movements to continue to exaggerate the wider market.
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At the time thisarticle was published David owns shares in Royal Bank of Scotland. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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