5 High-Beta Stocks That Could Explode

MINNEAPOLIS (Stockpickr) --The Fourth of July is upon us, and although weather in my home state of Minnesota is far from summerlike, I will not be deterred from enjoying this forthcoming celebratory weekend. I have many fond memories from celebrations past of family gatherings, picnics, activities - and most of all fireworks.

There is something in the DNA of every American that draws us to explosives. The danger and excitement certainly gets the blood pumping. The endorphin rush from loud booms and cracks have us always begging for more. The action and excitement from a grand fireworks display draws huge crowds far and wide.

We are a society of risk-takers. Fireworks may be banned in some states, but many of us are willing to drive far and wide to get our fix. Perhaps there is another way to find the action closer to home -- in the stock market. With its crazy, volatile price action, the stock market can provide a rush similar to the one one gets from fireworks -- and it's right in our backyard.

Related: 5 Big Stocks to Trade for Summer Gains

Anyone with a brokerage account can tap into the excitement at any time. The biggest fireworks in the market often come from stocks with the highest beta. Beta is a measurement of volatility and risk as compared to the rest of the market. A stock with a beta of one will move in lock step with the market. A stock with a high beta will move that much more than the market, and a stock with a low beta will move less.

For the biggest risk-takers, I offer these five high beta stocks that could explode.

American International Group

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Talk about a wild ride. Investors in AIG ( AIG) cheered when shares raced above $60 in early January. That move concluded a six-month run that essentially doubled its share price. During that time, stocks were up in value, but not like this.

Unfortunately for investors, it has been all downhill since that time. The market is more or less flat for the first half of the year, but AIG is down a whopping 50% year to date. Now that is what I call explosive.

The trick now is to catch this falling knife in hopes of a reversal. The lightning rod company, for all that was wrong with the financial sector during the crisis, has rebooted and is now solidly profitable. More important, macro-economic conditions are ripe for the company to repair its balance sheet.

Analysts expect the company to make $3.68 per share in the current fiscal year ending Dec. 31. At current prices, AIG trades for less than 8 times earnings. Such a low valuation is a bit of a protection given the beta risk in this stock. To the extent that we see a rally in the market, AIG is likely to move significantly higher.

AIG, one of the 5 Worst-Performing S&P 500 Stocks of 2011, was featured recently in " 5 Contrarian Bets From Bruce Berkowitz."

Wyndham Worldwide

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On the surface, the hotel and lodging business might seem stable. Why, then, does hotel chain Wyndham Worldwide ( WYN) have a beta of 3.41?

That kind of beta suggests wild moves for this stock relative to the rest of the market. The reason for these swings in Wyndham stock is directly related to the company's exposure to the real estate market. In the last decade, we have seen wild swings in real estate, and those stocks tied to that market have indeed moved crazily.

Over the last 52 weeks, Wyndham has seen its stock move up by more than 70%. During the same time the market as defined by the S&P 500 is up only 29%.

The average Wall Street estimate for the current year ending Dec. 31 is for Wyndham to earn $2.24 a share, growing by 16% to $2.60 a share in the following year. At current prices shares trade for less than 15 times earnings. There is no guarantee, of course, but buying a stock for a price earnings multiple less than expected growth can be very profitable. Include the high-beta nature and the stage is set for big returns.

Wyndham is one of the top holdings of John Keeley's Keeley Fund Management.

Ford

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Are gains in shares of automaker Ford ( F) related to an upward-moving market and a high-beta stock, or is the stock higher simply because the auto industry has rallied since bottoming in 2009? That's a bit of a chicken-or-egg question.

What we do know is that Ford has been on one heck of a ride. Ford has a beta of 2.42. Over the last year, shares have gained about 39%. The market is only up approximately 29% in the same time span. Since the start of the year, Ford is down 21% compared with a 5% loss for the S&P 500.

High beta is hurting Ford owners while the market struggles, but with many expecting gains in stocks for the remainder of the year, the timing may be good to own shares of Ford. From a valuation standpoint, shares of Ford are cheap today.

The average Wall Street estimate for profits in the current year ending Dec. 31 is $1.90 per share. At current prices, the stock trades less than 7 times estimated earnings. At that level, Ford is poised to move higher than the market should stocks change direction from here.

Ford, one of TheStreet Ratings' top-rated automobile stocks, is one of the top holdings of Ronald Muhlenkamp's Muhlenkamp Fund.

Cliffs Natural Resources

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Basic material stocks have been quite volatile thanks to worries about inflation. Add in the declines in the value of the dollar and the stage is set for big moves in share price. Cliffs Natural Resources ( CLF) is a mining company that focuses on iron ore and metallurgical coal. Its stock has a beta of 2.35. Over the last 52 weeks, Cliffs has exploded to the upside. Shares are up 97% compared to 29% gains for the S&P 500. Those gains have stalled though in 2011 as the stock traded more closely to the overall market.

With a second-half 2011 rally for the overall market, look for Cliffs to move significantly higher. Stock gains imply a strong economy and a strong economy implies inflation. That may be a bit simplistic, but that is how the market has been trading of late. As such stocks like Cliffs get lots of action from traders.

From a valuation standpoint, shares of Cliffs are cheap. Shares trade for just 6 times 2011 estimates. Any further increases in basic material prices directly translate into higher profits. That is the likely scenario over the next few months.

Cliffs was highlighted recently in " 5 Big Stocks to Trade for Gains."

Pier One

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When a company struggles, volatility shoots higher as investors speculate on the survivability of the entity in question. Until a final verdict arrives share price will likely fluctuate greater than the overall market. In the case of Pier One ( PIR), shares have swung wildly over the last three years. Close to $10 per share in 2008, the stock collapsed to below $1 per share. As the company was able to survive and recover the stock soared. Shares now trade for close to $12 per share today.

Pier One has a beta of over 5 thanks to that wild price action. Shares are up 89% in the last year well above market returns. Shares have held up relatively well since the end of April. The stock is only down 4% compared to a 5% loss on the S&P 500 index. Now with the market in rally mode, look for market beating returns to continue.

As for valuation, shares of Pier One trade for 15 times 2011 expected earnings. Wall Street analysts have the company growing profits by 13% from this year to the next. To the extent results exceed expectations shares could move significantly given the reasonable valuation.

To see these stocks in action, check out the 5 High-Beta Firecrackers for the Fourth of July.

-- Written by Jamie Dlugosch in Minneapolis.

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At the time of publication, author had no positions in stocks mentioned.

Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.

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