Beta is a measure of how responsive a particular share is to wider movements in the stock market index. A stock with a beta of more than 1 tends to be more volatile than the market index. For example, a stock with a beta of 1.5 has historically risen/(fallen) on average by 1.5% with every 1% gain/(fall) in the stock market index. This means investors who are anticipating a recovery in the stock markets would be better off by investing in high beta stocks.
Equity analysts usually use the five-year time period when analysing the beta of particular stock. But, as the beta for a particular stock can vary quite significantly over time, it is also important to look at beta over shorter time periods. A stock which has seen a fall in its beta is not as volatile or as responsive to changes in the market as they were in the past.
Here, we shall take a look at the five stocks with the highest five-year betas in the FTSE 350. Surprisingly, quite a few of these stocks have seen rather dramatic shifts in their betas in recent years.
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| Beta (5-year) | Beta (2-year) | Beta (1-year) | |
| Thomas Cook Group | 2.59 | -0.18 | -0.15 |
| International Personal Finance | 2.09 | 0.43 | -0.08 |
| Kaz Minerals | 2.06 | 2.92 | 1.25 |
| Vedanta Resources | 1.97 | 0.54 | 0.14 |
| Henderson Group | 1.97 | 1.73 | 1.59 |
With a beta of 2.59, Thomas Cook‘s (LSE: TCG) stock has the highest five-year beta in the FTSE 350. But, on a one-year and two-year time period, Thomas Cook’s betas are -0.14 and -0.18, respectively. This dramatic shift in its beta means Thomas Cook has shifted from being a very cyclical stock to one that is slightly counter cyclical.
There are many reasons for these recent shifts, and the main explanation is the recapitalisation and restructuring of the company back in 2012. Because of this, Thomas Cook has transformed itself from being an unprofitable and highly indebted business into one that is both profitable and financially sound. And as these changes seem to have structurally changed the nature of the business, the reduction in its beta will likely be long lasting.
Although the travel business is very cyclical, the determinants of travel spending is much more dependent on the local economic conditions of where the tourist originates, rather than global economic factors. In Thomas Cook’s case, its largest customer base is in the UK, Germany and the rest of Northern Europe, where economic conditions have been relatively benign. The weakening outlook for emerging market actually benefits Thomas Cook, as the associated falls in the value of their currencies have decreased the relative cost of foreign holidays in many so-called “sunny” locations.
International Personal Finance (LSE: IPF) has seen similar downward shifts in its betas. In this case, the reduction IPF’s betas is likely due to changing way investors look at the company. The focus of uncertainty for the short term loan lender has shifted away from the economy to legal and regulatory issues. And as the outlook of IPF’s earnings is increasingly determined by non-cyclical factors, IPF has become a less cyclical stock.
Kaz Minerals (LSE: KAZ) and Vedanta Resources (LSE: VED) have also seen unusual downward shifts in their beta (although Kaz Minerals did see an increase in its beta in the two-year period). This is all the more surprising, given that many mining groups, most notably Glencore, have seen their betas increase.
The shift in the beta of these two mining companies is likely due to the earlier falls in their share prices in 2014, as both companies have long been dealing with relatively high production costs and slow production growth. This should mean these shifts in their betas will only persist in the short term.
Global investment manager Henderson Group (LSE: HGG) has seen more limited shifts in its betas, reflecting the minimal structural change that has affected the company in recent years. The relative stability in Henderson’s beta should mean the stock would continue to perform in a reliably highly cyclical manner. Thus, this makes Henderson’s stock one of the best high-beta stocks to buy in anticipation of a market recovery.
