15 Shares Expected to Rise Fastest in a Recovery

LONDON -- Don't be distracted by the economic doom and gloom in the media. Shares have been good to investors recently. In the last 12 months, the FTSE 100 is up 11.4%. The last three months have contributed 4.9% of this rise.

If you are expecting shares to continue their rise, then you might like to research stocks with high betas. A share's beta is a measure of how its share price has moved relative to the market.

A share with a beta of 2.5 is one that, on average, has risen 2.5% for every 1% rise in the market and fallen 2.5% for every 1% decline.

Investors can make big profits holding high-beta shares in a bull market. Conversely, for investors with a portfolio of high-beta shares, losses will likely be high if the market crashes.

I trawled the market to find the 15 large-cap shares with the highest beta measurement. Remember, a share's beta can change. While in the past these shares have exaggerated the market's movements, that behavior might not continue in the future.

Company

Beta

Market Cap (million pounds)

Yield %

Price (pence)

Gulf Keystone Petroleum (LSE: GKP.L  ) 3.8 1,886 0.0 215
African Minerals 2.9 1,063 0.0 322
Ferrexpo 2.9 1,153 2.2 196
Kazakhmys 2.7 3,904 2.4 743
Cookson 2.6 1,663 3.7 597
Vedanta Resources (LSE: VED.L  ) 2.5 2,673 3.6 980
Taylor Wimpey 2.5 1,602 1.2 50
International Personal Finance 2.4 762 2.5 296
Laird 2.4 581 4.0 218
Royal Bank of Scotland 2.4 13,195 0.0 226
Travis Perkins 2.3 2,607 2.0 1070
Barclays (LSE: BARC.L  ) 2.3 22,466 3.3 184
Barratt Developments (LSE: BDEV.L  ) 2.2 1,362 0.0 141
Paragon Group 2.2 543 2.3 180
Inchcape 2.2 1,778 3.0 385

Four shares struck me as particularly interesting.

1. Barclays
The LIBOR scandal has seen Barclays' reputation and share price take a real kicking. Chief executive Bob Diamond was forced to resign and Chairman Marcus Agius will soon be following him out of the door.

The apparent crisis of management at Barclays may be attractive to contrarian investors. Furthermore, buyers appear to have the fundamentals on their side. At today's prices, Barclays looks cheap.

At the halfway stage, Barclays reported earnings per share of 21.8 pence and an interim dividend of 2.0 pence. Analyst consensus forecasts 32.3 pence in earnings per share for the full year and a dividend of 6.5 pence. This puts Barclays on a bargain forward price-to-earnings (P/E) ratio of 5.7, with an expected yield of a respectable 3.6%. Further progress in both earnings and dividends are expected for 2013.

In my book, this makes Barclays a recovery play.

If the profitability of the bank does recover at the rate forecast, do you think the shares will still trade for less than two pounds?

2. Barratt Developments
Shares in housebuilders will always be buffetted by investors' economic expectations.

Currently, the average price paid for a home in the U.K. is 161,000 pounds. This is an increase of just 0.9% on the figure one year ago. Sluggish house price progression is bad for housebuilders, as people delay purchases, either to continue saving or in the expectation of forthcoming price falls.

Every housebuilder's business plan is essentially the same: buy land, build a house on it and sell. The difference between the land and build costs versus the price of the house is where builders make their money. This means that small changes in the price of land and houses can have a massive effect on the profitability of companies like Barratt's.

Shares in builders are therefore a geared play on house prices. With growing speculation on the future of the economy, we should not be surprised that some shares of housebuilders are demonstrating high betas.

A recent trading statement from Barratt revealed an increase in margin on sales to 8.8%, up from 6.6% last year.

3. Vedanta Resources
As measured by its P/E ratio, Vedanta Resources is one of the cheapest blue-chip shares on the market today. The global resources group is today priced at just 5.6 times the consensus profit forecast for 2013.

That's the sort of rating that the market normally reserves for companies whose earnings are falling -- fast. Vedanta, however, is forecast to increase earnings again in 2014. The company also pays a dividend. For 2012, Vedanta paid out $0.56 to shareholders. This equates to a yield of 3.7%. That's a slight discount to the average FTSE 100 stock but still well ahead of cash.

Shares in the resources sector have all endured a tough time recently. One of the biggest concerns for investors is the likely direction of the Chinese economy. China is a huge consumer of metals and energy. A material setback in Chinese growth could hit suppliers hard.

4. Gulf Keystone Petroleum
Shares in Gulf Keystone Petroleum (GKP) have soared in recent years. In August 2009, the company reported a major discovery with its Shaikan-1 well in Kurdistan. Last week, GKP formally declared Shaikan to be a commercial discovery, another step toward development of the field.

Like most oil exploration and production shares, Gulf Keystone is a geared play on the price of oil. Add to this the tantalizing possibility of further significant finds and you get an extremely volatile high-beta share.

Private investors are frequently attracted to this kind of company. Shareholders can make money from the short-term volatility of GKP shares or the less immediate exploration activity. Add in the high market capitalization and small bid:offer spread, and Gulf Keystone is an inexpensive way of trading shares in an oil explorer.

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Further investment opportunities

David owns shares in Barclays and Royal Bank of Scotland. He does not own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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