10 Shares to Avoid Market Madness

LONDON -- Some shares have a history of rocketing skywards when the market leaps. Often, these are the same shares that collapse in a heap when the market stumbles.

These are what the statisticians call "high-beta" shares. If you do not want your investing experience to feel like a ride on a roller-coaster, then you should probably avoid high-beta shares.

A beta is a measure of how volatile a share's moves are, relative to the market average. For example, a share with a beta of 1.2 is 20% more volatile than the market.

Shares typically have low betas when there is more certainty over their future earnings. I trawled the FTSE 100 to find the shares with the lowest betas.

Four shares stood out in particular.

Company

Beta

P/E (forecast)

Yield (forecast, %)

Market cap (in millions of pounds)

Severn Trent (LSE: SVT.L  )

0.2

17.0

4.5

3,986

United Utilities

0.3

18.4

4.7

4,919

Smith & Nephew

0.3

13.7

2.2

5,845

AstraZeneca (LSE: AZN.L  )

0.4

7.9

6.1

36,666

Reckitt Benckiser (LSE: RB.L  )

0.4

14.9

3.5

26,362

National Grid

0.4

12.7

5.8

25,666

Centrica

0.4

12.3

5.0

17,195

Wm Morrison Supermarkets (LSE: MRW.L  )

0.4

9.9

4.4

7,715

Pennon

0.4

15.9

3.9

2,657

SSE

0.4

12.5

5.8

13,798

Data from Stockopedia.

1. Severn Trent
A large number of utilities make the top 10. Because of their near-monopolistic position and non-discretionary products, utility firms have very reliable earnings.

That doesn't make them sure-thing investments, though. Many carry substantial debts and the terms of those debts can change. Their pricing and conduct is also subject to the demands of their regulator.

Severn Trent's recent track record for profits and dividends is less impressive than some other blue chips. After four successive rises, the company's dividend was cut by 10% for 2011. It did, however, increase again in 2012 and is expected to grow by ahead of inflation for the next two years.

As for profits, while Severn Trent has not reported a loss in recent years, earnings per share has been quite volatile. While EPS growth is expected to return, profits are still some way off the figure made back in 2010.

2. Reckitt Benckiser (RB)
Reckitt Benckiser is one of the FTSE 100's most successful companies. This success has been built on its strong consumer brands such as Dettol, Harpic, and Calgon. The recognition that these brands have means Reckitt Benckiser is able to negotiate better prices.

In the last five years, dividends at RB have increased by an average of 22.1% per annum. Additionally, EPS has risen at an average of 18.1% in each of the last five years.

Unfortunately for RB shareholders, the growth is forecast to slow from here. Consensus is for little EPS growth this year and next. The dividend is expected to return to a more modest rate of increase, in line with inflation.

Given this outlook, we should take a look at RB's current valuation. The shares currently trade at 14.8 times 2011 times earnings. That's slightly less than the average in the FTSE 100. The dividend yield (3.4% last year) is par.

3. Wm Morrison Supermarkets (Morrison's)
While investor attention seems to be drawn to Tesco, there are other opportunities in the U.K. supermarket sector.

In the last five years, Morrison's has increased its dividend from 4 pence per share to 10.7 pence per share. That's an average compound annual growth rate of 21.7%, while EPS has increased at an average of 25.6% per annum.

Despite this, Morrison's shares trade on just 10.3 times 2012 earnings. With 5% growth forecast for 2013, this falls to just 9.9 times.

That's not expensive for a successful blue chip.

However, it would be foolhardy to dismiss investor worries in the sector. When even the market leader (Tesco) is struggling, it is natural to worry whether pain may be on the way for the rest. The most recent Kantar Worldpanel survey of the industry revealed Morrison's had lost market share.

Analysts expect dividend and EPS growth from Morrison's for the next two years. The dividend is expected to rise faster.

4. AstraZeneca
For a few years now, AstraZeneca has been the U.K. market's pharmaceutical income play.

That dividend is forecast to increase. The problem is that earnings at AstraZeneca are expected to fall. Obviously, if this continues then the dividend cannot be sustained.

On last year's payout, AstraZeneca yields 5.9%. This is expected to increase for 2012, taking the yield to 6.1%. The company trades on a forward P/E of 7.9. This kind of rating suggests that investors are close to writing AstraZeneca off.

The company has a new chief executive who is already making his presence felt. At the beginning of the month, the company's share buyback program was cancelled. This will deliver approximately $2.2 billion of savings this year.

It is unlikely AstraZeneca shares will re-rate without more significant measures being taken. Many commentators are expecting a big acquisition. Yet even this is unlikely to yield an immediate and lasting improvement in the AstraZeneca share price. Acquisitions are notoriously risky. Would investors accept a dividend cut to pay for one?

Investing in pharmaceuticals for income has been one of the big contributions to Neil Woodford's success. Woodford is one of the U.K.'s very best fund managers and a stock-picker par excellence. We have prepared a special free report on some of his share selections: "8 Shares Held By Britain's Super Investor." Get this report delivered to your inbox now and start learning from one of the best in the business.

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Further investment opportunities:

David O'Hara does not own shares in any of the above companies. The Motley Fool owns shares in Smith & Nephew and Tesco. 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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