10 Shares To Avoid Market Madness

Published in Investing on 26 November 2012

These shares could help you keep your head when the market goes wild.

Market analysts like to use statistical measures to classify investment opportunities. One popular measure is what they call a share's 'beta': a measure of its volatility versus the broader market's.

Impulsive private investors are often drawn to volatile high-beta shares. Long-term investors, including super-investors like Warren Buffett and Neil Woodford, frequently prefer low-beta shares: stocks that won't be tossed around by short-term market sentiment.

Later, I will explain how you can learn more from super-investor Woodford. Meanwhile, here are the 10 shares in the FTSE 100 (UKX) with the lowest beta.

NamePrice (p)BetaP/E (forecast)Yield (forecast, %)Market cap (£m)
Severn Trent15670.2116.54.83,739
United Utilities6720.3117.25.14,585
Smith & Nephew6610.3213.92.25,861
Reckitt Benckiser38540.3915.63.327,816
National Grid7120.3912.95.825,737
Wm Morrison Supermarkets2620.439.64.56,264

Data from Stockopedia.

Four companies stood out in particular

1) Smith & Nephew

Smith and Nephew (LSE: SN) is a specialist orthopaedic replacements manufacturer. In other words, it makes artificial joints and other body parts.

There is much less cyclicality in this industry sector than many others. Unlike the major resources firms, Smith & Nephew are not hugely dependent on the growth of Chinese industrial manufacture. Unlike the banks, Smith and Nephew's profits cannot be crushed by a setback in the US housing market.

The result has been regular and reliable profits.

Smith & Nephew's earnings per share (EPS) has increased at an average of 13.3% annually over the last five years.

The earnings growth has outstripped the dividend, which has also grown fast -- Smith & Nephew's dividend has increased every year since 2001. In that last five years, that payout has increased at an average rate of 10% per annum.

Unfortunately, it appears that Smith & Nephew's fantastic growth record is about to come to an end. Analyst consensus is for a 3.6% dip in EPS for 2012. A huge 31.9% increase in dividend is still expected for the year. Earnings growth is expected to return in 2013.

2) Reckitt Benckiser

Reckitt Benckiser (LSE: RB) has built a FTSE 100 company from a portfolio of leading domestic brands.

RB owns well-known household brands such as Dettol, Harpic and Calgon. These are must-stock products for the UK's supermarkets. The regard consumers hold RB's brands in gives the company has tremendous pricing power. Large sales then feedback into economies of scale -- increasing profits further.

RB's growth record is even better than Smith & Nephew's. In the last five years at RB, EPS has risen 18.1% per annum. Dividends have increased 22.4% on average in the last five years.

Like Smith & Nephew, growth at RB is also expected to slow over the next two years. In an attempt to address this, Reckitt last week announced the $1.4bn acquisition of Schiff Nutrition. RB expects this acquisition will immediately bring vital scale in the vitamins, minerals and supplements market in the US.

Reckitt Benckiser's long-term success has been built upon a series of strategic acquisitions like Schiff. Trading on a forward P/E of 15.6, RB is near the cheapest it has traded in five years.

3) Centrica

Domestic utility British Gas is owned by FTSE 100 utility firm Centrica (LSE: CNA).

While recent price rises have been controversial, the shares have not suffered and trade within 10% of their all-time high. As you might expect with a utility, the dividend yield is high.

In recent years, dividend growth has easily beaten inflation. The result is that the shares trade on a prospective yield of 5.1%, rising to an expected 5.4% next year.

EPS has also grown every year since 2009. Another two years of growth are expected, meaning Centrica shares trade on 12 times 2012 forecasts, falling to 11.4 times the expected numbers for 2013.

My attitude to price rises is that "if you cannot beat 'em, join 'em". If more British householders directly owned shares in the energy companies, that might help temper their grief at having to pay more for energy.

4) Wm Morrison

Shares in supermarket group Wm Morrison (LSE: MRW) (Morrisons) have been struggling. Currently, the shares trade near a three-year low.

Morrisons trades on 9.6 times forecasts for the full year. This means that on a price-to-earnings basis, shares in the company have not been cheaper in the last five years.

The dividend yield also tells a similar story. As Morrisons has grown considerably in recent years, the dividend has been rising fast. In the last five years, the payout has increased by an average of 21.0% per annum. As the share price has fallen recently, the yield has increased dramatically.

The result is that for the first time ever, Morrisons is now an income share.

Morrisons problem is a lack of growth. While EPS increased last year by 11.1%, a rise of only 3.9% is forecast for this year. Compared with peers Tesco and Sainsbury's, Morrisons is lacking two key planks in its offering: online and convenience.

Worryingly, Morrisons has been losing market share. If earnings go into reverse, the shares would likely continue their fall.

Neil Woodford owns a selection of some of the UK's lowest-beta blue chips. If you would like to learn more from this money-making genius, then get the free Motley Fool report "8 Shares Held By Britain's Super Investor" . This report will be delivered to your inbox immediately. Click here to get your hands on our insights into the mind of one of the UK's greatest ever investors.

> David does not own shares in any of the companies above. The Motley Fool owns shares in Smith & Nephew.

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MunroMan 26 Nov 2012 , 1:03pm

The reason low beta shares do well is that the market alway overpays for growth (high beta) stocks as Rob Arnott demosntrated in this article


Just avoiding those improves your returns.

jackdaww 26 Nov 2012 , 2:27pm

i hold only morrisons of these.

goodlifer 26 Nov 2012 , 8:24pm

"Long-term investors, including super-investors... like Warren Buffett, frequently prefer stocks... that won't be tossed around by short-term market sentiment."

Why do you say that's true of Warren Buffett?
He seems to me to say the opposite.

goodlifer 27 Nov 2012 , 5:06pm

"The market alway overpays for growth (high beta) stocks.

Good news if you're in selling mode, surely?

goodlifer 27 Nov 2012 , 7:55pm

I've just been reading "How I Recouped My Credit-Crunch Losses," which seems to favour volatility and a nice high beta.

What do you really think?

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