12 Shares for a New Bull Market
LONDON -- Since Sept. 5, the price of many blue-chip shares has rocketed. New policies from the European Central Bank have investors thinking the eurozone crisis could be nearing its end.
As a result, the share prices of riskier companies have risen sharply in the last two trading sessions. Vedanta Resources is up 10%, Barclays (ISE: BARC.L) is up 13%, and Kazakhmys is up 14%.
These shares are what the statisticians call "high-beta" stocks. Their movements usually exaggerate the market. A good day for the market is a great day for high-beta stocks. A great day (like Friday) is sensational. A bad day is a total stinker. The higher a share's "beta," the more it has previously exaggerated the market.
I trawled the market to find the high-beta stocks that magnify the market returns. Here are the 12 largest.
Market cap (millions of pounds)
Royal Bank of Scotland (ISE: RBS.L)
GKN (ISE: GKN.L)
Gulf Keystone Petroleum
Taylor Wimpey (ISE: TW.L)
Four stood out in particular.
Remember Bob Diamond? He used to be chief executive of Barclays. Diamond was a real rainmaker who was credited with the creation and growth of Barclays' investment banking operations. It turns out Bob wasn't so important after all. Barclays' shares are up 18.8% since Diamond left the firm. In that time, the FTSE 100 is up just 2.7%.
As investors start to think the eurozone crisis might be ending, they are placing more confidence in Barclays' profit forecasts.
Analysts are forecasting 2012 earnings per share of 32.4 pence, to be followed the next year by 36.2 pence. That is a 2012 price-to-earnings ratio of 6.2, falling to 5.5 for 2013. How many companies with such forecast growth trade on a more miserable rating?
The dividend yield is also reasonable. Barclays is expected to pay a dividend equating to a 3.2% yield. This is also expected to rise, hitting 7.2 pence per share for 2013 -- a yield of 3.6%.
2. Taylor Wimpey
Shares in homebuilder Taylor Wimpey are up 86.1% in the last 12 months. The company is expected to report a profit for 2012 and pay a small dividend.
Homebuilders profit from the difference between the cost of building a house and the price that they sell it for. This means that small fluctuations in house prices can have a big impact on profitability.
A range of factors are baked into a homebuilder's share price. Interest rates and the willingness of banks to lend affect how much a buyer can pay for a home. Expectations of house price inflation determine whether new properties sell fast or hang around. If consumers are confident, then they are more likely to commit to a higher mortgage.
The investment community clearly believes that if the eurozone economy can be turned around, then many of these factors will start to move in Taylor Wimpey's favor. Most house price surveys reveal a sluggish market. Can ECB action inject some life?
GKN shares demonstrate good value and reasonable income properties. The shares trade on nine times the consensus EPS forecast for 2012, falling to 7.8 times the 2013 number.
The dividend has been rising since a 5 pence payout for 2010. The company is expected to pay 7.1 pence for 2012. This is expected to rise again to 8.2 pence for 2013. At today's prices, the expected 2012 payout equates to 3.2%. At the interim stage, the company reported a 20% dividend rise and a 32% increase in EPS.
GKN's business is comprised of four divisions: driveline (automotive engineering), powder metallurgy (high-strength materials), aerospace, and land systems (large vehicles). At the halfway stage, driveline delivered almost half of GKN's revenue and more than twice the revenue of any other division.
A healthy European automotive sector is key to GKN's profitability. Europe's current malaise probably helps explain the company's current low rating. If Europe picks up, GKN's share price could rise fast as fears evaporate.
4. Royal Bank of Scotland
Shares in Royal Bank of Scotland (RBS) have also rallied significantly in the last few trading sessions. Shares in the taxpayer-backed bank are up 9.4% since Thursday morning and 14.3% since the beginning of August.
Mainstream media moaners may have written off RBS, but the stock market hasn't. The share price rise of the last few days suggests more investors believe RBS may finally be out of the woods.
Despite the rise, the shares still possess value attributes. The shares would have to double to reach the most recently reported net asset value of 489 pence. The forward P/E for 2012 is 11.7, falling to 8.7 times forecasts for 2013.
If the ECB's attempts to shore up the eurozone can show results, investors will reassess the value in RBS. I expect that the forecast profits and significant asset backing will support further share price rises.
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He avoided techs in the do-tcom 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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The article 12 Shares for a New Bull Market originally appeared on Fool.com.David owns shares in Royal Bank of Scotland. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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