Battle Volatility With This Sector

The last 8 months have been crazy volatile in the stock market.  We have seen the fear index called the VIX spike to above 52 then plunge into the 12.50 zone just several months later!  Just over the last several weeks, the volatility measuring VIX has climbed to above 30 and remains above the technical support lines of the 50 and 200-day simple moving average.

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  • This chaotic volatility is a God Send for short term day traders and others who thrive on profiting from sharp market moves without regard for direction.

    At the same time, many long-term investors are frankly frightened by the wild price swings that come part and parcel with the volatility.

    Long-term investors everywhere are asking. “where should we invest despite the volatile stock market”? 

    Our research has revealed a sector and two individual stocks that have set up to be great investments despite the current tricky conditions.

    First, let’s take a look at volatility.

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  • The VIX was first used in 1993. It’s built upon an idea credited to Professor Robert Whaley. The VIX is weighted mix of prices for a variety of options on the S&P 500. The options are based on the expected volatility or price change over the next month. I like to think of options as an insurance policy with the premium increasing as the risk level climbs.  This is very similar to automobile insurance.  The more accident, hence risky you drive, the higher the price of your auto insurance. The same thing can be said for option prices.

    The higher the VIX, the greater number of investors who think that stocks will plunge in value. The number of the VIX represents the annualized expected percentage down move of the S&P 500 over the next 30 days. (If you are mathematically inclined, the VIX is calculated as the square root of the par variance swap rate for the next 30 days.) The number has been as low as 9 and as high as 89 during the financial turmoil in 2008.

    A smart way to look at the VIX is as the S&P 500 upside down. As the VIX moves higher, the S&P 500 moves lower. When the VIX moves lower, the S&P 500 generally travels higher. The VIX is called “the fear index” for a reason. The greater the fear in the market, the more traders hedge their positions with options, driving up the price of the options, therefore the price of the VIX.

    How To Battle Volatility.

    Consumer discretionary is one sector that has been standing up against the volatility in the overall stock market.  The common definition of consumer discretionary is

    Consumer discretionary refers to the sector of the economy that consists of businesses that sell nonessential goods and services. Companies in this sector include retailers, media companies, consumer services companies, consumer durables and apparel companies, and automobiles and components companies.

    Consumer discretionary stocks tend to outperform during times that the consumer is happy.

    The average consumer is currently happy due to several reasons.

    First, U.S. unemployment hit an eight-year low in January.

    Secondly, average weekly earnings advanced  2.5% over the past 12 months.  Employers nationwide are reporting an increase in wages demands.

    Thirdly, the continued weakness in commodity prices, especially in energy. Cheap oil and gas mean lower prices for gasoline, heat and electricity. For lower-income Americans, energy typically accounts for 25% of their spending — so reduced expenses make a big difference in discretionary spending.

    Finally, the average American family has less debt, fewer high rate mortgages and more cash in the bank. Foreclosures are at a 17-year low. With interest rates still very low despite the Fed’s hike of short-term interest rates in December, American’s feel comfortable using credit to purchase big ticket items like autos appliances and travel.
    Two Consumer Discretionary Stocks You Need To Know


    1. Mohawk Industries (NYSE:MHK)

    Mohawk is the leading global manufacturer of flooring products: carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring.

    Its brands include American Olean, Bigelow, Daltile, Durkan, Karastan, Lees, Marazzi, Mohawk, Pergo, Unilin, Quick-Step and IVC. And the business has become truly global, with operations in Australia, Canada, Europe, Asia and Latin America.

    Two of the factors pushing the consumer discretionary sector higher are the bullish catalysts for Mohawk.

    First, low unemployment results in consumers doing home improvements. Secondly, the fear of climbing interest rates should supercharge home buying as consumers rush to purchase and/or improve their homes prior to additional rate increases.

    These factors lead to Mohawk experiencing strong sales growth from North American flooring products. Mohawk is a well-run company with solid balance sheet and commanding market shares; the stock should head higher over the next few quarters.

    Add in the fact that research from Grand View Research Inc revealed that the global flooring market is expected to reach $326.38 billion by 2020.

    The research report went on to advise that global flooring market demand was estimated at 161.19 billion square feet in 2013, and is expected to reach 240.10 billion square feet by 2020, growing at a CAGR of 5.9% from 2014 to 2020.

    In addition, the study pointed out that key industry participants include Shaw Industries, Mohawk Industries, Interface, Inc., Mannington Mills, Armstrong, etc. Developing a vertically integrated infrastructure is expected to be a critical success factor for gaining market share. As a result, mergers and acquisitions, coupled with meeting consumer preferences through product differentiation have been among the key strategies adopted.

    1. Walt Disney Co. (NYSE:DIS)

    Disney is an entertainment conglomerate that will continue to benefit as long as the current trend continues in consumer sentiment.

    The company’s boast a climbing cash flow and manageable debt.

    Disney describes itself as a diversified international family entertainment and media enterprise with five business segments: media networks, parks and resorts, studio entertainment, consumer products and interactive media.

    Media Networks comprise an array of broadcast, cable, radio, publishing and digital businesses across two divisions the Disney/ABC Television Group and ESPN Inc.

    Walt Disney Parks and Resorts (WDP&R) is a provider of family travel and leisure experiences. The Walt Disney Studio brings movies, music and stage plays to consumers throughout the world.

    Disney Consumer Products (DCP) delivers product experiences across thousands of categories from toys and apparel to books and fine art.

    Disney Interactive is a creator of interactive entertainment across all current and emerging digital media platforms.

    CEO Bob Iger bullishly explained on the 2016 first quarter conference call.

    Q1 performance was the greatest single quarter in the history of The Walt Disney Company and a phenomenal start to FY ’16. Revenue was up 14%, net income was up 32% and adjusted earnings per share were up 28%, to $1.63 which is our highest quarterly EPS ever and is also our 10th consecutive quarter of double digit EPS growth.

    We had tremendous performance across our portfolio of businesses. With the incredible success of Star Wars: The Force Awakens, our studio delivered $1 billion in quarterly operating income for the first time in history. Our parks and resorts also made history, with nearly $1 billion in operating income. And our consumer products and Interactive business set another record, with $860 million in OI.

    Key Takeaway:

    Consumer discretionary has proven itself to be a great hedge against stock market volatility.  As long as consumer sentiment remains in a growth phase, consumer discretionary stocks are expected to outperform.

    We firmly believe that Walt Disney Co and Mohawk Industries are ideally positioned to be strong investments in 2016 and beyond.

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