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.
2013 P/E (forecast)
2013 yield (forecast, %)
Market cap (£m)
Kazakhmys (LSE: KAZ)
Royal Bank of Scotland (LSE: RBS)
Eurasian Natural Resources
GKN (LSE: GKN)
ITV (LSE: ITV)
Anglo American (LSE: AAL)
Legal & General
Data from Stockopedia
These five shares stood out:
Royal Bank of Scotland (RBS)
RBS shares have risen 9.2% so far in 2013. Without doubt, RBS is recovering. Analysts expect that the bank will report a profit for 2012 and 2013. Management has even started to discuss the possibility that RBS will be declaring a dividend within the next two years.
Although RBS looks set to be fined for its traders' role in fixing LIBOR, there is also some good news. In October, RBS successfully divested 35% of its stake in Direct Line Group, raising £920m. RBS has also benefited from new regulations that look set to bring in a less restrictive set of reserving rules on banks than had been feared.
If the UK economy can avoid a deep recession, RBS profits could improve dramatically.
So far this year, Kazakhmys' share price performance has been less than may have been expected for what has long been a high-beta share.
In the last five years, shares in the metals producer have traded as high as 1,600p; they fell as low as 250p during the depths of the financial crisis. Kazakhmys is most exposed to copper. Copper is thought of as the industrial metal whose market is most geared to global industrial trends. Of the industrial metals, the price of copper is the most volatile.
As Kazakhmys' profits depend on the price of copper, this makes Kazakhmys' share price volatile. 2012 earnings are expected to come in at around half the amount that the company made in 2011.
Television production company ITV had a great 2012. Its shares rose over 50% as the television advertising market recovered.
ITV is expected to report 2012 earnings 40.1% ahead of 2011 profits. Earnings per share (EPS) is forecast to increase another 7.1% for 2013.
While ITV shares may have been high beta previously, I do not expect that to continue. First, the shares currently trade on quite a normal valuation. There are not large numbers of investors that could change their minds dramatically and shift the share price massively. Second, with the eurozone economy now apparently moving out of critical, the risk to ITV's future earnings has waned.
I cannot see ITV shares rising massively from here, whatever the wider market does.
Like Kazakhmys, Anglo American's profits depend on market prices for the raw materials it produces.
Shares in Anglo suffered badly in 2012 following severe industrial unrest at some of its platinum operations in South Africa. This forced shares in Anglo American to a three-year low. With these problems now less urgent, Anglo American shares will likely return to being valued on their fundamentals.
The 2013 P/E for the Anglo American is less than the average for a FTSE 100 (UKX) stock but also far higher than many of its peers. With hindsight, the time to have bought the shares was back in November when striking platinum staff returned to work.
GKN is a specialist engineering firm. Losses in 2008 and 2009 forced GKN to cancel its dividend. However, the company has come back strong. GKN is expected to report 2012 EPS of 24.1p. That's ahead of the profit that the company was making in the years before the financial crisis. The dividend is expected to be increased for the third year running and put in another double-digit rise for 2013.
You would be wrong to simply think of GKN as a geared play on the automotive industry. The company's aerospace, powder metallurgy (parts) and land systems (machinery) divisions generated more sales in aggregate in the three months ending October 2012 than the automotive division managed.
Despite the forecast growth, the 2013 P/E is less than 10. To my eye, the shares look cheap.
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