We warned you in recent times: volatility could impact the total return of your portfolio this summer. But fear not, as I take a look at the stocks that not only are susceptible to volatility, but also those I think should benefit from turbulent market conditions!
Vix Swings
Volatility, as gauged by the VIX index, surged by 30% to 16.95 on Thursday last week — a spike preceded by another bad day of trading in mid-July, when the VIX index rose by more than 30% to 14.5. The index closed at 15 on Monday, i.e. some 25% below its long-term average and the safety threshold — but was back up again to 17 on Tuesday.
In this environment, shares of GlaxoSmithKline (LSE: GSK), Next (LSE: NXT) and British American Tobacco (LSE: BATS) offer plenty of upside and could also provide a hedge against volatility if the stock market turns south.
Retailers
Take Next. The retailer is growing fast in a tough competitive environment. Moreover, it boats hefty operating margins and a strong balance sheet. Its shares are still relatively cheap against rivals, although they look a bit pricey based on several trading metrics — both on a trailing and a forward basis. Still, management know exactly what they are doing: guidance has been recently upped in the wake of a market-beating performance.
There aren’t many companies I would pick in the UK retail space right now. In fact, if volatility rises, shares of Tesco, Sainsbury’s as well as those of other food retailers will be hammered, in my view. ASOS, SuperGroup and boohoo.com are three names to avoid, too. One outlier is Ted Baker.
Glaxo And BAT
Glaxo and BAT are two very different stories that could similarly surprise investors. The former is troubled, for several reasons, but its valuation has plunged well below fair value following a recent profit warning. Its shares are a bargain at this level. For its part, BAT is a solid company whose shares, based on trading multiples, offer upside of up to 10% to the end of the year. Both companies should benefit from volatile market conditions.
How About TMT, Utilities, Oil & Others?
I don’t like BT very much as I believe management have yet to prove they can grow the business profitably over time, but BT could be a decent play against volatility. I think the Technology, Media and Telecoms (TMT) sector offers little long-term value at this point in the business cycle. Elsewhere, Diageo and SABMiller will certainly prove defensive, just like a few other well-capitalised companies in the space.
I also believe BG, BP and Royal Dutch Shell are names to hold as part of a diversified portfolio, which should retain minimal exposure to such miners as Rio Tinto and BHP Billiton.
Shares of companies whose financials are stretched — such as Premier Foods, Balfour Beatty and Enterprise Inns — and/or whose sustainability has been questioned – such as Quindell and Blinkx – will struggle if volatility surges. Similarly, shares of businesses such as Royal Mail, Thomas Cook and FirstGroup will come under pressure, given that operational hurdles are apparent.
Shares of banks and industrial groups aren’t likely to shine in difficult market conditions, although I would bet on industrial groups boasting exposure to the US market. As far as utilities are concerned, my favourite choice is National Grid, which promises a nice balance of yield and growth, but I would certainly avoid Centrica and Severn Trent.
