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Executive Summary

  • In our previous article we recommended John B Sanfilippo and Son (NASDAQ:JBSS) as our top idea and set a target price of $44 per share and substantial return upside.
  • JBSS' risk and correlation profile makes it even more appealing allowing portfolio managers to reduce risk.

JBSS Highly Desired Risk and Correlation Profile

Below we have estimated the expected values for each of the measures and indexes below based on the daily historical observations.

Measure

JBSS

S&P600

SPY

PSL

Realized Volatility Annualized

45.23%

25.52%

16.72%

15.20%

JBSS Beta to Index

43.29%

70.3%

79.12%

R-Squared

6.0%

8.2%

7.1%

Correlation

0.24

0.29

0.27

At first glance JBSS is a highly volatile stock with a 45% observed annual volatility with relatively modest Betas ranging from 43.29% to small caps and topping out at 79.2% to the consumer staple sector.

Considerable benefit lies in JBSS's low correlation to common index returns. For a small capitalization stock JBSS has unusually low correlation to the S&P 600 of 0.24 when compared to the large capitalization S&P Depository Receipt (NYSEARCA:SPY). Furthermore, JBSS shows a low correlation to the Power Shares Consumer Staples ETF (NYSEARCA:PSL). As a comparison, high yield bonds have shown a correlation of 0.5 or more to equities over most recent observable periods.

JBSS' low correlation gives investors an opportunity to add JBSS allocations and reduce portfolio risk. This phenomenon can be observed in the negatively sloped portion of the volatility curves below as allocations to JBSS are incrementally added.

The below table calculates the estimated portfolio volatility at the given JBSS allocation level. Small capitalization managers will note JBSS can be given a larger allocation and still reduce portfolio risk. Large capitalization portfolios will realize reduced risk with a more modest allocation. For those managers seeking asset selection alpha within the consumer staples sector (versus allocation alpha) JBSS can be added up to 5% in a consumer staple portfolio without increasing portfolio risk.

JBSS Weight

S&P600

SPY

PSL

0.5%

25.447%

16.702%

15.191%

1.0%

25.377%

16.687%

15.179%

5.0%

24.892%

16.674%

15.204%

10.0%

24.468%

16.910%

15.513%

15.0%

24.258%

17.417%

16.116%

20.0%

24.266%

18.172%

16.981%

25.0%

24.493%

19.144%

18.070%

50.0%

28.552%

26.265%

25.704%

75.0%

36.016%

35.349%

35.125%

100.0%

45.228%

45.228%

45.228%

Minimum Vol

24.258%

16.674%

15.179%

JBSS Allocation

15.0%

5.0%

1.0%

(click to enlarge)

Conclusions

We have identified JBSS as our top recommendation. Our recommendation recognizes JBSS, from a valuation/return perspective as an undervalued stock with substantial upside and minimal downside. JBSS' risk and correlation profile make the stock even more appealing with the possibility of reducing overall portfolio risk.

Source: Adding JBSS And Reducing Risk: Augment Your Portfolio With This Low Correlation Stock