We don’t know whether any of these factors will turn out to be toxic for the market but we do know that markets never rise in a straight line and that sooner or later the Footsie will suffer a sharp correction. In such circumstances some sectors and stocks will be hit harder than others.

Beta

Beta is a measure of a stock’s volatility compared with the overall market. The market’s beta is one. Stocks with a higher beta than one will tend to swing more than the market. For example, if the market rises 1%, a stock with a beta of 1.5 will rise 1.5%. This is great in a rising market but in a falling market the same effect applies in reverse.

So, which sectors and stocks are likely to be hardest hit if the FTSE 100 tanks?

High beta

Sectors whose prospects are closely tied to the performance of the wider economy generally have above-average betas.

According to financial data site Digital Look, the three stocks with the highest betas in the FTSE 100 are all housebuilders. Taylor Wimpey (LSE: TW) heads the list with a beta of 2.5, followed by Barratt Developments (2.4) and Persimmon (2.3).

Financial stocks also figure prominently, with Barclays (LSE: BARC) having the highest beta of the banks at 2.1 and insurer Legal & General at the head of other financials with a beta of two. Also with a beta of two, and the highest-ranked stock from outside the housebuilding and financial sectors, is British Airways owner International Consolidated Airlines (LSE: IAG).

Cheap, but …

Taylor Wimpey’s shares slumped as low as 116p in the wake of the EU Referendum when fears that the UK could head into a recession were rife. However, forecasts for economic growth have remained fairly robust and the housebuilder’s shares have recovered a whopping 63% to 189p, not far below their pre-referendum high of 210p.

The stock still looks cheap on a trailing P/E of 10.4, with a 5.8% dividend yield, but this is a stock I would look to buy around the bottom of a housing cycle or during a major market correction, as we saw after the EU Referendum.

Just too cheap

International Consolidated Airlines trades on a remarkably low trailing P/E of 6.8 at a share price of 546p. The company has steadily increased its operating margin over the last few years and looks in good shape. The group faces a challenging environment, including weak sterling having an adverse impact on earnings and a glut of new capacity in the industry pushing down fares, but a P/E of 6.8 just looks too cheap to me.

Wide margin of safety

Barclays trades on a relatively high trailing P/E — 17.6 at a share price of 227p — but, as the benefits of restructuring come through this year, the P/E is forecast to fall to 11.5. As the P/E-to-earnings growth ratio is 0.2 and the shares trade at a 22% discount to tangible net asset value, there appears to be a wide margin of safety here, making the shares attractive to my eye.

The post Which stocks will get hammered if the Footsie falls? appeared first on The Twelfth Magpie.

More reading

• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• Why Barclays shares could have a huge second half of 2026
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?
• Up 50% in a year! That’s not the only reason I’d consider buying Barclays over Nvidia stock today
• Barclays shares could soon soar another 21%, according to the latest price target

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Investors will probably need to protect themselves against further volatility in the rest of the year, as uncertainty about global economic growth continues to increase. Weak export data from numerous countries, slowing consumer spending and worldwide financial volatility all point towards slowing growth. And having considered these downside risks, the OECD today lowered its expectation for global growth in 2016 to 3.0%, down from the 3.3% it predicted in November.

Buying low beta shares is one method of reducing the sensitivity of your portfolio to general market volatility. “Beta” is a measure of how sensitive a particular share is to changes in the market as a whole, so low beta shares should provide stability during those turbulent times.

The following three shares have a five-year beta of less than 0.5, which means these shares have historically risen/(fallen) on average by less than 0.5% with every 1% gain/(decline) in the FTSE All-Share Index, the most-inclusive popular UK equity index. To determine whether they are worth investing in, I shall now look at each in greater detail.

Attractive income

GlaxoSmithKline (LSE: GSK) has recently seen big declines in its profits, as the patent expiry of a few blockbuster drugs has exposed the company to intense pressure from generic drug-makers. 2015 marked a new low point for the company, with annual core earnings per share declining for the sixth consecutive year, after falling 15%, to 75.7p in 2015.

Despite this, the company maintains a strong competitive position in the respiratory, vaccines, HIV and consumer healthcare markets. In addition, it has a strong development pipeline, with up to 20 new treatments seeking regulatory approval by 2020. Glaxo has already launched seven major new drugs in recent months, and looking forward, these new products could potentially bring in more than £4 billion in additional annual sales.

Shares in Glaxo seem a little expensive on an earnings basis, as they trade at 16.9 times its expected 2016 earnings, but they are very attractive from an income standpoint. Glaxo currently yields 5.8%, and analysts expects its forward dividend yield will rise to 6.1% by the following year.

Slowing growth

Pearson‘s (LSE: PSON) shares have been heavily sold off in recent months, as investors have begun to fret about the company’s slowing growth outlook. For 2016, management expects to generate adjusted operating profits of between £580 million and £620 million, which represents a fall of around 13% on its expected 2015 level. Adjusted EPS is expected to decline to between 50p and 55p this year, which gives its shares a forward P/E of 15.2 at the mid-point.

Although, the near term outlook for the company is gloomy, the longer term outlook remains broadly intact. The company’s competitive position is strong, and cyclical factors have been largely to blame for its recent weakness. A fall in US college enrolment had hurt sales and new product launches raised costs, but these impacts should only be temporary. The market for education remains a big growth opportunity.

Recovery forecast

A weaker insurance rating environment is set to cause earnings at Jardine Lloyd Thompson (LSE: JLT) to decline for the first time since 2011. Underlying EPS for the insurance broker is expected to have fallen 11% in 2015, to 51.7p, because of increased investment in its US business and weakness in its UK employee benefits business due to recent government changes to UK pension rules.

However, the company is forecast to make a recovery in the following year, with analysts expecting underlying EPS to rebound by 13%, to 58.3p. This gives shares in Jardine a very reasonable valuation of 13.5 times its expected 2016 earnings. What’s more, its shares have a prospective dividend yield of 4.1%.

The post Protect Your Portfolio With GlaxoSmithKline plc, Pearson plc & Jardine Lloyd Thompson Group plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Jardine Lloyd Thompson. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.