For Uncertain Times: Stocks with Low Beta and High VIX Correlation

With technological advances has come an increase in algorithmic trading, or trades based solely on mathematical equations that occur without any human input other than from the individuals who built the algorithm. Algorithms can be programmed to buy and sell large blocks of shares with price changes of $0.01 or less. These trades are also known as high frequency trades (HFT) because the trades occur within milliseconds.

But when things “go wrong” they can go really wrong, as demonstrated by Knight Capital Group (KCG), which ran into the classic high-tech trading error: The Knight Capital mishap affected 148 stocks after their algorithm purchased shares without any human input, and when the company later sold the assets, the losses amounted to around $400 million, pushing the firm to the brink of bankruptcy.

In fact, Duncan Niederauer, chief executive of NYSE Euronext Inc said last Friday in response to Knight Capital, “Speed is not always better…Market structure has gotten incredibly complex. It’s virtually impossible to explain to a policy maker or an investor any more.”

This interactive chart shows how HFT has evolved over the last 5 years, ending in January 2012. It’s pretty incredible.

Beta

So how can you find stocks that aren’t highly correlated to the overall market? One way is to look at the beta indicator.

“Beta” is presented as a number from which you can glean much about the stock’s volatility or risk compared to the overall market. It measures how the stock has behaved relative to the market in the past (often a useful predictor for future performance, although past performance does not guarantee future results).

A beta of 1 indicates the stock has generally moved in tandem with the market. Ex: When the market rose by 2%, the stock rose by 2% as well. A beta between zero and 1 means the stock has generally been less volatile than the market (less risk for investors). Ex: When a beta is 0.5 – 50% less volatile than the market – if the market rose by 2%, the stock generally rose by 1%. When the market dropped by 2%, the stock generally dropped by only 1%.

In the same fashion, a beta greater than 1 means the stock has generally been more volatile than the market (more risk for investors).

If a stock has a negative beta, it means the stock has generally moved in the opposite direction of the market. Ex: If beta is -0.5, when the market dropped by 2%, the stock generally rose by 1%. If beta is -2, when the market rose by 2%, the stock generally dropped by 4%. If a stock has a beta of zero, it means the stock has generally behaved independently of the market over time.

Business Section: Investing Ideas

Keeping Beta in mind, we wanted to screen for stocks that could be independent of the markets, although past performance does not guarantee future results. We ran a screen of stocks with a market cap above $50 million with a Beta between -0.25 and 0.25 for independence.

Then, because the markets can often be unpredictable, we ran a screen to see which of these stocks perform well in times of high volatility, with a high positive correlation to the VIX index. This indexes the volatility of all of the stocks in the S&P 500. That means if the S&P 500 is highly volatile, the VIX index climbs, and these correlated stocks tend to climb with it.

Historically, in times of uncertainty these stocks have performed well. Do you think they will continue to hedge the market going forward?

1. Commercial National Financial Corp. (CNAF, Earnings, Analysts, Financials): Operates as a holding company for the Commercial Bank & Trust of PA that provides various commercial banking and trust services primarily in Pennsylvania. Market cap at $60.78M, most recent closing price at $21.10. Beta at -0.12. Correlation with the VIX index at 0.773 over the last 60 days.

2. Kentucky First Federal Bancorp, Inc. (KFFB, Earnings, Analysts, Financials): Operates as the bank holding company for First Federal Savings and Loan Association of Hazard, and First Federal Savings Bank of Frankfort that provide various banking and financial products and services in Kentucky and Perry counties. Market cap at $59.91M, most recent closing price at $7.74. Beta at 0.02. Correlation with the VIX index at 0.503 over the last 60 days.

3. Auburn National Bancorporation, Inc. (AUBN, Earnings, Analysts, Financials): Operates as a holding company for AuburnBank that offers various banking products and services in east Alabama. Market cap at $78.26M, most recent closing price at $21.50. Beta at 0.13. Correlation with the VIX index at 0.779 over the last 60 days.

4. ChinaEdu Corporation (CEDU, Earnings, Analysts, Financials): Provides educational services to the online degree programs of universities in the People’s Republic of China. Market cap at $82.66M, most recent closing price at $4.61. Beta at 0.13. Correlation with the VIX index at 0.697 over the last 60 days.

5. Diamond Foods, Inc. (DMND, Earnings, Analysts, Financials): Engages in processing, marketing, and distributing snack products, as well as culinary, in-shell, and ingredient nuts. Market cap at $381.64M, most recent closing price at $17.39. Beta at 0.14. Correlation with the VIX index at 0.508 over the last 60 days.

6. TF Financial Corporation (THRD, Earnings, Analysts, Financials): Operates as the bank holding company for Third Federal Bank that provides various financial products and services in Pennsylvania and New Jersey. Market cap at $67.25M, most recent closing price at $23.68. Beta at 0.15. Correlation with the VIX index at 0.511 over the last 60 days.

7. TIB Financial Corp. (TIBB, Earnings, Analysts, Financials): Operates as the bank holding company for TIB Bank that provides a range of commercial and retail banking, and financial services to businesses, individuals, and families in Florida. Market cap at $134M, most recent closing price at $10.85. Beta at 0.18. Correlation with the VIX index at 0.598 over the last 60 days.

8. Old Point Financial Corporation (ODOF, Earnings, Analysts, Financials): Operates as the holding company for The Old Point National Bank of Phoebus that provides consumer, mortgage, and business banking products and services for individual and business customers. Market cap at $52.38M, most recent closing price at $10.56. Beta at 0.24. Correlation with the VIX index at 0.615 over the last 60 days.

(Written by Ryan Horch)

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Dig Deeper: Access Company Snapshots, Charts, Filings

Commercial National Financial Corp. (CNAF, Chart, Download SEC Filings)
Kentucky First Federal Bancorp, Inc. (KFFB, Chart, Download SEC Filings)
Auburn National Bancorporation, Inc. (AUBN, Chart, Download SEC Filings)
ChinaEdu Corporation (CEDU, Chart, Download SEC Filings)
Diamond Foods, Inc. (DMND, Chart, Download SEC Filings)
TF Financial Corporation (THRD, Chart, Download SEC Filings)
Operates as the bank holding company for TIB Bank that provides a range of commercial and retail banking, and financial services to businesses, individuals, and families in Florida. Market cap at $134M, most recent closing price at $10.85. Beta at 0.18. Correlation with the VIX index at 0.598 over the last 60 days. (TIBB, Chart, Download SEC Filings)
Old Point Financial Corporation (ODOF, Chart, Download SEC Filings)

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