THE brutal selloff in shares between May 1 and May 18 has been instructive for traders. During this period the All Ordinaries Index fell 9.7 per cent, before bouncing about 1.7 per cent over the next two trading sessions. But some stocks moved much more aggressively.
If this volatility continues, there is far greater chance of making money out of high-beta stocks than low-beta stocks. Beta is a measurement used by traders to gauge if individual stocks move greater or less than the overall market.
Following the selloff, we can assume volatility has returned and to simply sit it out will probably end up in losses. While it is not for everyone to get the greatest bang for your buck, traders need to identify what are the highest beta stocks. The key will be to avoid them on the way down and dive in on the way up.
From May 1 to May 18, commodity drilling play Boart Longyear tumbled 31.5 per cent, before rebounding 9.5 per cent in just two trading sessions. OneSteel sank 36 per cent and then popped 12.5 per cent higher. Rounding out a nice troika was Fortescue Metals, which dived 26.3 per cent before recovering 9.2 per cent.
It is critical that when you are trading a quick bounce in stocks that you stick with highly liquid names. To climb into a stock that hardly trades is normally easy to get in to but hard to get out of.
Banking on yield
FOR those long-term investors who don't have the stomach for rapid trading, some opportunities seem to be emerging at the small end of the banking sector. These companies have been relentlessly sold down in recent months despite appetising yields.
Bendigo and Adelaide Bank is trading on a price-to-earnings multiple of less than eight times earnings, with a yield of about 8.5 per cent, fully franked. The stock is friendless, falling almost 20 per cent in the past few months. Bank of Queensland has fared slightly better, trading on a P/E of about 10 times and a yield of 8 per cent.
Drop another notch and we find Wide Bay Australia yielding about 8 per cent and Tasmanian minnow MyState pushing up towards 9 per cent.
These companies are all under pressure and earnings expectations may have to be wound back but there is no suggestion profits are going to collapse and dividends slashed. For longer-term players it could be worth starting to look at what represents great value.
Tatts Group (TTS)
IN CONTRAST, there have been some companies that have hardly trembled in the May selloff. They can be divided into defensive and high yield. Qualifying in both categories is wagering and lotteries outfit Tatts Group. The stock has powered higher by 14 per cent and paid a dividend of 11? a share over the past six months. Investors were impressed by the half-year result and are looking to a strong June half following some large lotteries.
Investors, though, should keep in mind several factors about Tatts before getting too excited. The company will lose its poker machine licence in Victoria at the end of this financial year. Earnings will adjust down, putting the company on a price-to-earnings ratio of about 14.5 times 2013 earnings, a healthy premium to the industrial market average of 12 times. The decline in earnings will result in a lower dividend given the company already pays out about 90 per cent of its profits.
Former fund manager Matthew Kidman is director of WAM Capital. The Age accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.