|Back to main|
Investing 101: Five Profitable Stocks with a Strong VIX Correlation
(List compiled by Eben Esterhuizen, CFA. Price data sourced from Yahoo! Finance. Profitiablity data sourced from Fidelity.)
Worried about the possibility of extreme market volatility? If you are, you're not alone. Judging by the VIX index, also known as the "fear gauge", there are plenty of nervous investors.
So, how can you protect your portfolio against a spike higher in the VIX index, i.e. increased market volatility?
To help you get started, we explore a universe of stocks with positive correlation to the VIX index while also screening for only the stocks deemed most profitable in their industry based on gross, pre-tax and operating margins.
We were left with five names which we have listed with relevant data below.
Before viewing the list, take a moment to review the functions of the VIX index and the implications of the profitability metrics:
Trailing twelve months (TTM): An indication that the calculated data has come from the last twelve months. For example, if data released in July 2045 is "TTM" (ie, P/E TTM or "Trailing P/E"), this means the price and the earning-per-share data comes from the twelve-month period of August 2044 to July 2045.
TTM Gross margin: This metric that tells us the percentage of a company's revenue is left after paying all production expenses. Costs include overhead, payroll and taxation. ((revenues - cost of goods sold) / Revenue ) *100 = Gross margin %
TTM Operating margin: This tells us the percentage remaining after all operating expenses are paid. Operating expenses include: supplies, repairs, research and development, and depreciation. (Operating Income / Net Operating Revenue) *100 = Operating Margin %
TTM Pretax margin: A company's earnings before taxes. This incorporates all of the expenses associated with business excluding taxes. It can help to determine the overall operating efficiency of the firm. The higher the pretax margin, the more profitable the company. (Net profit before taxes / net sales) *100 = Pretax Margin
The VIX index measures the implied volatility of S&P 500 index options. In other words, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. A higher index value means that more investors are expecting extreme market volatility (i.e. higher levels of investing risk).
Correlation measures the tendency of two data sets to vary together. In other words, if a company's price changes have a strong positive correlation to the VIX index, it means that its price will tend to rise if the VIX index rises (i.e. positive correlation = direct relationship).
If, on the other hand, the company's price changes have a negative correlation to the VIX index, it means that its price will tend to fall if the VIX index rises (i.e. negative correlation = inverse relationship).
All of profitable companies mentioned below have strong positive correlation to the VIX index, based on price trends over the last quarter. In other words, based on price data from the last 3 months, these companies will tend to rise in price if the VIX index rises.
If you're worried about increased market risk, this list might offer a useful starting point for your next investing idea. But please keep in mind that past performance is no guarantee of future results--just because these stocks have seen gains during times of extreme market volatility, does not mean that they will do so again in the future. (Note: The closer a correlation statistic is to 1, the stronger the positive relationship).
Use the list below as a starting point for your own analysis:
Analyze These Ideas (Tools Will Open In A New Window)
1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned
1. China Fire & Security Group, Inc. (CFSG): Engages in the design, development, manufacture, and sale of various fire safety products for the industrial and special purpose infrastructure industries, as well as the design and installation of industrial fire safety systems in the People's Republic of China and India. Correlation to the VIX index over the last 60 days stands at 0.513. TTM gross margin at 46.86% vs. industry average at 32.19%. TTM operating margin at 17.9% vs. industry average at 12.36%. TTM pretax margin at 18.78% vs. industry average at 10.7%.
2. Collectors Universe Inc. (CLCT): Provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, memorabilia, and stamps in the United States. Correlation to the VIX index over the last 60 days stands at 0.79. TTM gross margin at 62.91% vs. industry average at 53.32%. TTM operating margin at 21.73% vs. industry average at 21.68%. TTM pretax margin at 18.86% vs. industry average at 18.17%.
3. EV Energy Partners LP (EVEP): Engages in the acquisition, development, and production of oil and natural gas properties in the United States. Correlation to the VIX index over the last 60 days stands at 0.535. TTM gross margin at 65.26% vs. industry average at 33.03%. TTM operating margin at 18.01% vs. industry average at 16.8%. TTM pretax margin at 22.21% vs. industry average at 17.47%.
4. White River Capital Inc (RVR): Engages in specialized indirect auto finance business. Correlation to the VIX index over the last 60 days stands at 0.569. TTM gross margin at 46.63% vs. industry average at 31.19%. TTM operating margin at 45.61% vs. industry average at 27.19%. TTM pretax margin at 39.62% vs. industry average at 22.9%.
5. Telefonos de Mexico, S.A.B. de C.V. (TMX): Provides telecommunications services primarily in Mexico. Correlation to the VIX index over the last 60 days stands at 0.501. TTM gross margin at 60.64% vs. industry average at 50.2%. TTM operating margin at 24.65% vs. industry average at 15.49%. TTM pretax margin at 19.89% vs. industry average at 13.83%.