Do you worry about volatility when considering stocks? One idea is to keep in mind is a stock's historical correlation to volatility. Stocks that are highly correlated may have been treated as "safe havens" for uncertain times.
We started by looking for stocks in the Basic Materials sector for those that are highly positively correlated to volatility, as measured by the VIX index, over the last two months. This means that these stocks have historically tended to move up as volatility spikes. We found 18 companies that met the criteria.
Given the volatility of the macro economic environment, we decided to focus on a cyclical sector such as the basic materials sector.
Stock price volatility can be caused by several factors such as the announcement of relevant company news, sector specific catalysts, supply and demand of a particular stock, and nowadays macro economic news. Here we will focus on the fundamentals of the company that can impact volatility.
From the 18 companies on our list, we looked for companies with a debt-to-equity ratio of less than 0.1. This allowed us to focus on strong credit quality companies. Also, when we analyzed the balance sheet we focused on the total debt of the company instead of only long-term debt. We found 4 companies that met the criteria.
A Closer Look
Although we provide you a list of four companies that show a positive correlation to volatility, here we focused on Silvercorp (NYSE:SVM) that announced a share repurchase program to acquire 8.5 million common stock from February 1st, 2013 to January 31, 2014, representing 5% of the company's outstanding stock. This might be the last card to play to reverse the decline of the company's stock due to the recent negative tape surrounding the lawsuits against the company.
The company's balance sheet consists of $89 million in cash and cash equivalents, and $47 million in short-term investments. The company has a debt-to-equity ratio of 0, which is a significant positive. The company does not have any term loans and credit facilities.
The stock trades around $4.33 versus its 52-week range of $4-$8.45, and trades with a P/E multiple of 17 times. The stock yields 2.3%. Do you think the company is a safe haven? Do you think the recent stock underperformance is overdone?
Interactive Chart: Press Play to compare changes in monthly return for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
Do you think volatility is ahead for the market? Use this list as a starting point for your own analysis.
1. Randgold Resources Limited (NASDAQ:GOLD): Engages in the exploration and mining of gold mines in west and central Africa. Market cap at $8.74B, most recent closing price at $94.89. Correlation with the VIX index at 0.51 over the last 60 days. Debt-to-equity at 0.
2. Harmony Gold Mining Co. Ltd. (NYSE:HMY): Engages in underground and surface gold mining operations in South Africa and Papua New Guinea. Market cap at $2.92B, most recent closing price at $6.72. Correlation with the VIX index at 0.581 over the last 60 days. Debt-to-equity at 0.06.
3. Silvercorp Metals Inc. : Engages in the acquisition, exploration, development, and operation of silver mineral properties in China and Canada. Market cap at $741.14M, most recent closing price at $4.34. Correlation with the VIX index at 0.593 over the last 60 days. Debt-to-equity at 0.
4. Tanzanian Royalty Exploration Corp. (NYSEMKT:TRX): Engages in the acquisition and exploration of mineral properties in Africa. Market cap at $361.44M, most recent closing price at $3.59. Correlation with the VIX index at 0.664 over the last 60 days. Debt-to-equity at 0.02.
*Price data sourced from Yahoo! Finance, all other data sourced from Finviz.