High beta
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.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
What is beta and why does it matter for investors during market volatility?
Beta is a measurement traders use to gauge whether an individual stock moves more or less than the overall market. In volatile periods, high-beta stocks can swing much further than indexes, offering greater trading opportunity (and higher risk) compared with low-beta names.
How did the May 1–18 selloff illustrate opportunities in high-beta stocks like Boart Longyear, OneSteel and Fortescue?
During the May 1–18 selloff the All Ordinaries fell about 9.7% and then bounced; some high-beta stocks moved far more. Boart Longyear plunged 31.5% then rebounded 9.5% in two sessions, OneSteel sank 36% then rose 12.5%, and Fortescue Metals dived 26.3% before recovering 9.2%. Those extreme moves show how volatility can create rapid trading opportunities in high-beta names.
What trading approach does the article recommend for handling high-beta stocks in volatile markets?
The article suggests avoiding high-beta stocks on the way down and considering diving in on the way up. It also stresses sticking to highly liquid names so you can get in and out quickly — high volatility can reward active traders but also amplify losses.
Are there income or value opportunities among the smaller banks after the recent selloff?
Yes. The article highlights the small end of the banking sector as offering appetising yields despite heavy selling. Examples include Bendigo and Adelaide Bank (P/E under 8, yield around 8.5% fully franked), Bank of Queensland (P/E ~10, yield ~8%), Wide Bay (yield ~8%), and MyState (yield approaching 9%). These names may be worth investigating for long‑term income investors.
What should investors know about Bendigo and Adelaide Bank and Bank of Queensland as dividend-paying stocks?
Both banks have been heavily sold down, which has pushed yields to attractive levels: Bendigo and Adelaide Bank is trading on a P/E of less than eight with about an 8.5% fully franked yield, while Bank of Queensland trades around 10 times earnings with an ~8% yield. The article notes earnings expectations may need adjusting, but there’s no suggestion profits will collapse or dividends will automatically be slashed.
Why is Tatts Group (TTS) described as both defensive and high yield, and what risks should investors consider?
Tatts has behaved like a defensive, high‑yield stock: it’s risen around 14% and paid dividends over the past six months, helped by a strong half-year result and large lotteries. Risks include the loss of its Victoria poker machine licence at the end of the financial year, which will reduce earnings and likely lead to a lower dividend. The company is on about 14.5 times 2013 earnings, a premium to the industrial average of 12, and pays out roughly 90% of profits.
How important is liquidity when trading quick bounces and what does liquidity mean for everyday investors?
Liquidity is critical for trading quick bounces: it means the stock trades frequently and in sufficient volume so you can buy or sell without large price impact. The article warns that stocks that hardly trade are often easy to get into but hard to get out of, increasing execution risk for short‑term traders.
Should everyday investors sit out volatility or try to take advantage of it?
The article argues that simply sitting out returning volatility may lead to missed opportunities or losses. However, rapid trading in high‑beta stocks isn’t for everyone. Long‑term, income‑focused investors might prefer looking at beaten-up small banks with attractive yields, while active traders can target high‑beta, liquid names — and investors should consider personal risk tolerance and seek advice if unsure.
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