On the face of it, 2015 has been a relatively quiet year in terms of market volatility. But for the sharp spike in August, the market’s fear gauge — the CBOE Volatility Index (VIX) — is down on a year-to-date basis. However, sudden sharp sell-offs followed by quick recoveries underscored what the year was like for market participants.
Now, several key market watchers signal higher volatility for the next year. In such a scenario, picking value stocks that have a low beta might be a prudent option. Beta measures the tendency of a stock's returns to respond to market swings. Low correlation stocks provide protection during turbulent times as they are less prone to day-to-day fluctuations.
VIX’s August Blues
VIX started the year with 17.79 but dipped to a year-to-date low of 11.95 on Jul 17. However, the fear gauge scaled a high of 40.74 on Aug 24. VIX had reached this dangerous point during the 2008 financial crisis and also in Aug 2011 when the Congress and President Obama were struggling over the debt-ceiling crisis.
The high touched on Aug 24 coincided with a market rout. In the previous trading session, on Aug 21, the fear-gauge index had skyrocketed 46.5% to close at 28.03. The Dow had entered correction territory on Aug 21, after declining 10.1% from its record high in May.
Combined with an all-time high loss on Aug 24, the S&P 500 also entered correction territory, while the Dow declined to an 18-month closing low. However, the VIX started retreating soon after as markets rebounded. In the next two sessions, VIX plunged 11.6% and 15.8%.
Sudden Periods of Disquiet
Currently, the VIX is above its average for last year. However, it is well below its average level for the long term and has declined on a year-to-date basis. Most of this is attributable to a considerable decline over the last three months. However, the fear gauge has increased 12.3% over the last six months and by 9.5% over the last year.
Additionally, it is important to keep in mind that the VIX had risen sharply during the end of last year. Moreover, its median value as of last week was 15.29 which represents a marginal increase for the year. This shows the occurrence of brief bouts of disquiet.
According to a note released recently by Bank of America’s BAC wealth management arm Merrill Lynch, the markets have been building milestones in the manner in which it spikes up from a state of placidness to disquiet and back. Merrill Lynch also said that such events are likely to recur going forward as well and may explain why several large investors have performed poorly this year.
More Volatility Next Year?
A number of factors indicate that volatility will increase next year. Markets will continue to experience small and sharp plunges and their frequency may increase. The Fed’s program of rate hikes will continue even as Europe and Japan continue to provide monetary easing measures. This could result in a selloff of domestic stocks and bonds with relatively higher risk.
Additionally, more stringent market regulations and pressure on liquidity could push volatility up further. A slump in demand in China and developing economies accompanied by domestic wage growth could put pressure on corporate profits. This could result in losses for stocks.
Our Choices
Even though the markets are calm at the moment, levels are likely to edge up. The manner in which the market experiences volatility has changed, and such a trend is likely to continue into the next year.
Thus, picking value stocks with a low beta and positive dividend yield would be a good option. Our selections are also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.
OFS Capital Corporation OFS is a closed-end, non-diversified management investment company.
OFS Capital holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The stock has a beta value of 0.18. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.57, lower than the industry average of 8.78. It has a PEG ratio of 0.5, lower than the industry average of 1.89.The stock has a dividend yield of 12.3%.
Carnival Corporation CCL operates as a cruise and vacation company. As a single economic entity, Carnival Corporation & Carnival plc forms the largest cruise operator in the world.
Carnival holds a Zacks Rank #2 and has a Value Style Score of ‘B.’ The stock has a beta value of 0.78 and a P/E (F1) of 16.29x, compared to the industry average of 21.22. It has a PEG ratio of 0.92, lower than the industry average of 1.50. The stock has a dividend yield of 2.2%.
Navios Maritime Acquisition Corporation NNA provides marine transportation services. It is an owner and operator of tanker vessels focusing on the transportation of petroleum products and bulk liquid chemicals.
Navios holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ The stock has a beta value of 0.79 and a P/E (F1) of 5.35x, lower than the industry average of 8.10. It has a PEG ratio of 0.36, lower than the industry average of 0.88. The stock has a dividend yield of 6.6%.
Sibanye Gold Limited SBGL is a gold mining company based in Houghton, South Africa.
Sibanye Gold holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The stock has a beta value of 0.8 and a P/E (F1) of 13.83x, lower than the industry average of 40.51. It has a PEG ratio of 0.54, lower than the industry average of 3.05. The stock has a dividend yield of 2.9%.
Gilead Sciences Inc. GILD is a biopharmaceutical company, which focuses on the discovery, development and commercialization of drugs for several indications
Gilead holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ The stock has a beta value of 0.82 and a P/E (F1) of 8.64x, lower than the industry average of 25.57. It has a PEG ratio of 0.9, lower than the industry average of 1.81. The stock has a dividend yield of 1.7%.
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