Ranking high-return, low-volatility shares

The chart below was created by taking the 300 FTSE 350 companies that have seven or more year’s historic price data and then using regression analysis to calculate the slope of the regression line and the R-squared for each of the 300 companies’ year end share prices for the last ten years. These 300 pairs of figures (i.e. a gradient figure and R2 for each company) were then plotted on a scatter chart (below).

Regression analysis on year-end share prices of FTSE 350 companies [2004-2013]_bThe above chart is interesting. A line of best fit has been drawn which has a positive slope, which indicates that shares with higher returns tend to also have higher R-squareds (i.e. lower volatility around the trend line).

This is a Good Thing – this is what investors want: shares with high returns and low volatility.

Shares are therefore attractive in the top-right quadrant of the chart above (i.e. shares with positive returns and R2 over 0.5). An example would be Rotork (circled in the chart) with a slope gradient of 2.82 and R2 of 0.91 for its year end share prices since 2004..

To identify shares in the top-right quadrant we can calculate the multiple of the slope gradient and R2 and rank shares in descending order by this value.

The following table shows the top 20 shares in the FTSE 350 Index as ranked by this multiple of slope gradient and R2. This is, in effect, a ranking of the highest-return/lowest-volatility shares for the past ten years, and as such they might be regarded as the best trending shares over that period.

Company TIDM Slope R2 Slope x R2
Personal Assets Trust PNL 13.05 0.83 10.84
Randgold Resources Ltd RRS 6.26 0.73 4.55
Spirax-Sarco Engineering SPX 3.46 0.86 2.96
Reckitt Benckiser Group RB. 3.00 0.90 2.70
SABMiller SAB 2.89 0.93 2.67
Rotork ROR 2.82 0.91 2.56
Spectris SXS 3.29 0.77 2.54
British American Tobacco BATS 2.65 0.96 2.54
Intertek Group ITRK 2.89 0.84 2.43
Croda International CRDA 2.55 0.87 2.22
Rightmove RMV 2.95 0.75 2.20
Next NXT 3.40 0.62 2.11
Shire SHP 2.41 0.86 2.07
Aveva Group AVV 2.25 0.88 1.98
Aggreko AGK 2.14 0.87 1.85
Weir Group WEIR 2.28 0.81 1.84
Whitbread WTB 2.26 0.62 1.40
Unilever ULVR 1.46 0.93 1.35
Petrofac Ltd PFC 1.76 0.75 1.31
Hargreaves Lansdown HL. 1.68 0.77 1.28

 

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