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The Return of Volatility

The Return of Volatility

The Return of Volatility


Market gyrations have finally returned and it threw the market for a tailspin. The DOW experienced 1,000+ point swings earlier in the week, which is something it hasn’t experienced in a long time. As I mentioned in The Inflation Conundrum, fears of inflation and interest rates rising faster than expected were the catalyst that started all the recent mayhem in the market. What we are beginning to witness, folks, is a regime change in stock market volatility.


Take a look at the VIX chart below, which is a widely used index to measure implied volatility in the markets.


Yeah…the right side of the chart looks slightly above average.


The VIX spiked to levels not seen since 2015. During this period of unusually low volatility, investment bankers (every god damn time!) didn’t hesitate to capitalize on this opportunity. It is estimated that around $8 billion worth of volatility-linked products were created during this bull run. That obviously didn’t end well this week as owners of these assets continued to watch prices plummet in a dramatic fashion. Check out the chart below showing the change in asset flows of some of the most popular short-volatility ETFs from Jan. 31 to Feb 6.


Source: Bloomberg


As you may know, I’m not a huge fan of ETFs, which I mention here. As central banks take their foot off the gas and rates rise from historically low levels, there will be no more hand-holding for investors. Stocks and other risk assets were artificially bid up due to central banks pushing down bond yields to historic lows. Monetary policy forced investors to put their money into any asset that could at least earn their cost of capital. But that’s all changing. Assets need to reprice and undergo price discovery in a regime without extensive government intervention. What we witnessed this past week was the beginning of a re-adjustment period. The market will inevitably hit some air pockets as it flushes out some of the risky behavior that occurred during one of the longest bull runs in history. This is all a natural phenomenon and I think it’s good for the market. It’s even better for individual stock-pickers.

Volatility Creates Opportunity


The best thing about volatility is that it creates opportunities for stock-pickers like myself. It’s tough to generate any alpha when the whole market just keeps grinding higher. This is why hedge funds have been getting flushed out during this lengthy bull run. There were simply too many hunters and not enough deer to hunt. As those dynamics shift, its time to get off my ass and start hunting!


This looks like me on a typical weekend.


With the recent sell-off, opportunities are already starting to crop up. Here’s a few names currently on my radar.


Newell Brands Inc. (NYSE: NWL): I’ve been watching this one for about 2 weeks now. NWL is a consumer conglomerate that owns high quality brands like Sharpie, Elmer’s glue, Marmot, Rubbermaid and many more. The company is expected to report earnings on February 16th, so I’ll wait to get full year 2017 numbers, but just off my initial analysis this stock looks undervalued. This company is undergoing a transformation and may need to spin-off some assets to become a more focused company. This may turn into a multi-year turnaround, but definitely a quality stock and cheap valuation with a nice dividend to boot.


HCP, Inc. (NYSE:HCP): This just popped onto my radar within the last few days. I actually like REIT valuations here. I think some REITs are just getting thrown out with the proverbial bath water. HCP is an owner of high quality real estate assets in the medical and life sciences field. They own hospitals, senior living homes and medical office facilities (labs, research centers, etc.).  I think private market valuations are selling for much higher than what the private market is giving it credit for.


Grupo Aeroporto (ADR) (NYSE:PAC): I’ve looked at this Mexican airport operator about a year ago, but was too gun shy to make a move. The stock is in a very attractive market facing secular growth tailwinds as the Mexican middle class continues to grow. The company also operates in a government sanctioned monopoly. Its a symbiotic relationship where the company has to invest an agreed upon Capex amount to maintain and grow the airport facilities, which in turn relieves the government of having to foot the bill on Mexican citizens.


CVS Health Corp (NYSE:CVS): I actually own this company already, which I purchased in the middle of 2017. The price hasn’t really gone anywhere since, but I think the stock has gotten even more attractive with the Aetna acquisition. It’s a solid player in a consolidating healthcare market. I think the Amazon fears are completely overblown. Thinking about adding to my investment at these prices.


Sabra Health Care REIT (NASDAQ:SBRA):  I also own this stock, which I purchased in December of 2017. The price has declined about 15% (ouch!), but as I watch the price drop it actually makes me more excited. If you look at prevailing cap rates on these properties, and compare the differences between private market valuations and how the public market is valuing SBRA, there is a pretty wide discrepancy. Similar to HCP, I see a wide disconnect. Historically, public market values tend to track closely with private market transactions. I’m thinking about adding to my position, but will wait until earnings come out, which is expected to be on Feb. 28. With the previous acquisition of Care Capital Properties being baked into the full year 2017 numbers, I think the stock might be more attractive than what I initially underwrote.


I have an interest in making an investment in each of these ideas, permitted the stock price hits my buy range. Most of these companies will report earnings later in February so I would like to see the latest numbers before making a move. I’ll be sure to write a research report on any stock I actually plan on buying.


If you have any recommended stocks you’re looking at please feel free to share in the comments below!



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