RBS (LSE: RBS) (NYSE: RBS.US) is a stock that I’m thinking of buying more shares because it seems that ‘risk-on’ is back on in the stock market.
Indeed, in the last month or so there has been a significant pickup in merger and acquisition activity, share listings and corporate bond issuance and it feels as though sentiment seems to be improving.
The latest major global acquisition was that of Tokyo Electron by Applied Materials to create a $29 billion group, with it being yet another sign that confidence, the most valuable commodity in investing, could be making a welcome return.
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So, with this in mind, I’m thinking of taking some risk and adding to my existing holding in RBS for the following three reasons.
Firstly, RBS has a beta of 1.6, which means that its share price should move at a rate of 1.6 times that of the wider market. So, if the stock market goes up 10%, RBS should go up 16%. Of course, if markets were to fall 10%, RBS should fall 16%.
So, RBS is more risky (according to its beta) than the average stock and, as such, it looks to fit the bill for someone who wants to take more risk at present.
Secondly, RBS continues to gain strength as a result of the disposal of its less attractive assets. Although Barclays was recently required to conduct a rights issue, RBS did not need to and remains adequately capitalised, in my view.
Of course, it still has a long road ahead of it before it returns to full-health, but it is certainly on the right path and I’m comfortable with the strength of its balance sheet.
Thirdly, RBS is expected to deliver very impressive earnings per share growth in the next two years, with the market expecting earnings to grow by 185% this year and 70% next year. This is well-above the market average and, although these are just estimates, they show that RBS has the potential to be a super growth stock.
So, I’m bullish on RBS because it has a high beta at a time when I’m keen to take more risk, as well as the improving quality of its asset base and excellent growth prospects.
