My Investing Journey with Passive Income, Stocks, and Cryptocurrencies!

Category: REIT Page 1 of 3

Correlations in my Portfolio

I decided to do a correlation analysis on my ENTIRE PORTFOLIO of stocks (and some ETF’s). In case you don’t already know CORRELATION measures the possible relationship between two items, in this case their price movements. Keep in mind, correlation isn’t causation and there could be a 3rd (or even more variables) that are influencing these movements.

Also, note, CORRELATION changes over time, it doesn’t stay the same from one week to the next, or in the case of extremely volatile markets, correlations may diverge quickly. In addition, correlation doesn’t tell you anything about the magnitude at which one stock would follow another. Just because one stock goes up 20%, the other will not necessarily follow.

I took the Year to Data data from finance.yahoo and exported into Google Sheets. I then ran correlations using FUNCTIONS, putting the values into the TABLE shown below.

Here is a link to the pdf

Stocks with NO CORRELATION to other stocks

The first thing I noticed was there are some stocks that share no strong correlation with other stocks. Namely, Marten Transportation, Allison Transmissions, Teradyne, Mindmed, and Virgin Galactic. Honestly, I expected Mindmed to be disconnected due to the small size of the stock and the extreme volatile nature of price action. Likewise, Virgin Galactic is similar in behavior, being a company that has yet to generate any revenues, profits, and is a high beta stock. What are the surprises? I fully expected Marten would be somewhat correlated to the Russell 2000, companies of similar market cap, or SAIA (another trucking stock I own). However, this turns out not to be the case. Teradyne is another surprise; I wrongfully assumed this stock would have correlation with other tech stocks in my portfolio. It shows no strong correlation with any other stock in my portfolio.

Are any stocks correlated with TLT?

Seeing as how TLT is one of the few things with a history of negative correlation with the stock market, I was interested to see if anything might follow TLT closely?

One of the most interesting things in the data set is how Chewy shares the most correlation with TLT, a value of .690, Gold is the 2nd highest at .490.

A possible explanation? Last year, Chewy was seen as a stay at home stock, safer from the pandemic exposure. Since the beginning of the year and the opening up trade, Chewy has slid a bit. It appears, there is a small directional movement with TLT, acting as a FEAR trade. This is the only possible explanation I can offer.

On the other hand, look at my REGIONAL BANK, Citizen’s Financial Group; it shows a negative correlation of -.765. One plausible explanation-as yields drop, the price of TLT increases, and Bank stocks inversely drop. It’s assumed banks make more money if interest rates are higher. One might infer that TLT and CFG (or another regional bank stock) may act as a hedge on the other. I know some people like to dabble in trading pairs and this evidence could be promising to do that (outside of my realm).

What about INTERNATIONAL EXPOSURE?

IPAC is the only pure international play I have in my portfolio; exposure mostly to Japan and Australia. .646 with ITOT or the Total Stock Market ETF, .786 with IWM (Russell 2000). This does show that this particular ETF is not as correlated as it has been in the past, so, offering another layer of diversification with the Broad Market.

UBER AND PINTEREST

Uber and Pins seem to be in their own world, the only stocks with somewhat closer correlation with one another. Both big growth stocks, both more speculative and volatile.

Netflix seems to be in a class by itself as well, while it does share some relationship with PINS (.755), it shows no signs of strong correlation with anything.

Gold?

Gold (IAU) and Kirkland Lake (Gold Miner) are closely correlated at .911 as expected. IAU is not closely correlated to the Broader market or The Russell 2000 Index. On the other hand, I did notice there seems to be a somewhat negative correlation to the HOSPITALITY industry. -.656 with Hyatt, -.573 with Ryman Hospitality Properties, -.401 with Xenia Hotels. I currently don’t have much of an answer why gold and the hospitality industry would be negatively correlated. I am not seeing any correlation between inflation fears and gold price at the moment, so it must be something other than inflation/price worries. However, with this data, trading pairs of IAU and a hotel stock might be something someone could play around with? Looking back over the data, I do notice that TLT and the hospitality sector seems to have a very negative correlation as well. Perhaps we are back to the opening up trade again, things like Gold and TLT represent FEAR and the hospitality industry represents SAFE, so they are trading opposite at the moment.

OIL?

I was quite anxious to see if my XLE, oil/energy ETF would have strong correlation with anything other than the broad market. The findings:

The strongest correlation is with my bank stock. Once again, maybe oil and the bank stock are moving in tandem due to interest rate and inflation concerns? I expected it to be correlated somewhat with Eastman Chemicals (.885) as it is an industrial as well.

CLOSING THOUGHTS

This was a fun project. I learned some things I didn’t know about my portfolio, such as correlations existing that I wouldn’t have thought existed. Part of the reason I did this is because I still want to trim my portfolio down. If I have a bunch of correlated stocks, one of them might make a good prospect for being cut from the portfolio. In the future I plan to do a shorter time span correlation analysis to see how the numbers are changing in the last month. We must keep in mind Correlation is not a static number, it changes day to day, environment to environment. Once again, it says nothing about the magnitude of gains or losses. So new data must be taken in and changes made from there.

Investing Lessons I’ve learned the last 2 years

1)Buy and Hold is a great strategy but not ALWAYS the best strategy. I have had serious winners (up 30%) turn to losers (down 30%) in a hurry. I held on because I believed in buy and hold. Meanwhile, I would have been better off to take some off the table. I ALWAYS take a bit off the table every other quarter or so. This provides a psychological benefit of “winning” as well 🙂


2)Check a companies BOND RATINGS. This has become even more evident during the recent Coronavirus Crash. You are seeing companies that have paid dividends for decades have to cut their dividend. Many of these companies were downgraded to Junk and downgraded again. Look to see the standing of the bonds of the company you are investing in. Use the Moody’s website, create a free account. You can do this research quite easily for most large-cap stocks.


3)Check companies’ EARNINGS in detail. If you see the earnings dropping quarter to quarter over the course of a year or more, it may be time to get on another horse. These companies are not growing. It doesn’t matter if they pay a dividend if your TOTAL RETURN is seriously negative. Buy companies with some growth, whose revenues and earnings are increasing.

4)Debt/Equity Ratio-Once again, the Coronavirus Crash is showing just how important this is. If the company is overleveraged, in hard times like this, it will not be able to meet it’s debt. Invest in companies with PLENTY of cash and reasonable debt levels.


5)Don’t over diversify-I think one issue I had with my portfolio initially is simply too many positions to keep up with. Ideally, I’d like 20 at the most, maybe even 15 really good ones. You don’t HAVE to own every sector with individual stocks if you already have a good index fund.

6)Don’t fall for the P/E trap. What I mean is, just because something has a low P/E, does NOT mean it is undervalued. First and foremost, it is ridiculous to believe the rest of the investing world can’t look at a P/E number and ascertain whether it’s valued appropriately…..so yeah, it’s most likely “priced in.” Not all sectors have the same P/E values, tech can have higher P/E values. Companies on their last leg can have very low P/E numbers but that doesn’t make them undervalued.


7)Don’t forgo BONDS-Luckily, I never had this problem but it bears repeating. I often see people tell younger investors you don’t need to use bonds/bond funds. I think this is ridiculous. One of the reasons my IRA and Roth aren’t down as bad as they could be is because of the bonds. They have a HUGE purpose in a portfolio.

8)”Cash is Trash”. A famous investor recently said that and I know I’m taking it out of context but cash is DEFINITELY not trash. Cash is SUPER important and should be conserved so when a buying opportunity comes along, you can take advantage of it. One thing I did wrong last year is I just kept buying, all the time. Then, when I had lower prices, I didn’t have enough cash to buy. NEVER AGAIN! I think I want to have 10% of my portfolio in cash going forward. Get the money in the market but also don’t just throw it all in at once.


9)Cut losers QUICKER. That is right, when a company drops 20%, maybe it’s time to sell. Not always but sometimes. Personally, I’ve found when I get a quick drop like that I almost always come out better if I just sell. Have a game plan, once you lose a certain percentage, get out. Do not mindlessly use a buy and hold approach, reassess the situation.

What am I buying?

1)Universal Forest Products is a new position I started, it is a small-cap company in the lumber, backyard equipment, gardening supplies area. They also supply materials for Construction as well

2)Chewy– I’m still taking Nibbles at CHEWY :)….a few shares here and there. My wife and I use Chewy for our two cats (Sid and Ellie) and we love the service. At this point, I consider this a speculative bet though.

3)Mcgrath Rentcorp-I was FINALLY able to buy shares of this company at a reasonable price. The books look great and it is well managed. Another small-cap stock.

4)Still buying Stanley Black & Decker

5)Schneider Trucking and Marten Transports-You MAY be thinking, didn’t this guy just sell SNDR? I did, but I kept a small portion of my shares and at these prices, I think TRUCKING STOCKS present an incredible bargain. They were already priced for a recession and have held up pretty well during the Corona Crash.

6)Taking small nibbles at ITOT and QQQ every few days. I know we can’t time the bottom so I am just buying around 2400 and under mark on the S&P 500. These are great index ETF’s that I want to hold until retirement.

7)Hooker Furniture Company-another small-cap I’ve been holding almost two years. This presents me with a great opportunity to lower my cost basis considerably. I am down around 40% in this stock, luckily it’s not a huge position but I believe in the company long-term, if it can get past the Tariff stuff (and now the virus!)

8)Lowe’s-I had recently bought Home Depot to swing trade and here I am with Lowe’s this time for another swing trade. I am up 3.5% after one day so far, I play on getting out around 5-6% unless it just blasts up and then I will, of course, hold longer.

Will Dividend Investing Protect you more?

I will preface this article by stating I do a good bit of “Dividend Investing.” At the same time, it is not all I do.

One common argument by dividend investors is that by focusing on Dividends, you are more protected during a market correction, recession or bear market.

How has that technique faired in this Coronavirus Correction? Let’s take a look at some major ETF’s.

ITOT (Total Stock Market ETF containing 3633 holdings): It pays a distribution of 2.05% and is currently down 22.11% YTD.

NOBL (A Basket of 65 S&P Dividend Aristocrats): It pays a distribution of 2.13% and is currently down 24.54% YTD

DGRO (A basket of 477 Dividend Growers): It pays a distribution of 2.48% and is currently down 22.76% YTD.

If we do some quick math here and add back in the dividends we get a total return of the following, all numbers NEGATIVE (Yes, I realize that doesn’t take into account some factors over the next year but we have to work with knowable here)

ITOT 20.06%, NOBL 22.41%, DGRO 20.28%.

If you look at those numbers; NOBL is the worst performer, even taking into account the dividend. ITOT and DGRO are very close; DGRO paying a greater dividend.

ITOT holds the largest number of companies, followed by DGRO, followed by NOBL. I believe the greater diversification is part of the protection equation.


SECTOR exposure plays a big part here:

ITOT is 8.45% tech, 5.33% IT services

NOBL is 9.41% chemicals, 7.86% Household products

DGRO is 12.06% banks, 9.13% Pharmaceuticals

The lack of TECH exposure within NOBL is part of the reason it doesn’t perform as well poorer. DGRO has 4% Software and 3% Tech storage/hardware exposure and notice the better performance.

It turns out over the last 4 weeks, DGRO has fared slightly better than ITOT; NOBL is still behind. It remains to be seen how each will do over the next month or so.


Some other considerations when focusing on dividends:

LOTS of Dividends have been slashed during this Coronvirus Crash:

Here are just a few:

  • Macy’s
  • Occidental Petroleum
  • Ford
  • Darden Restaurants
  • Nordstrom
  • L Brands
  • GAP
  • Texas Roadhouse
  • FCX
  • Cracker Barrell
  • Delta
  • Boeing
  • Marriot
  • AMC

There are many on that list that NO ONE would have predicted would have to cut their dividend. For example, if you just looked at Delta’s payout ratio, you wouldn’t have thought it was at risk? Some of those companies have been paying dividends for DECADES.

Please keep this in mind: The risk of a DIVIDEND stock is compounded by the possibility of its dividend being cut/reduced. When the dividend is cut, it sells-off, causing the price to crash further. You not only lose the dividend but you lose the total return as well.

Furthermore, something that MANY Dividend Investors don’t realize. When that dividend is cut, a dividend-focused ETF has to remove it from it’s holding. Thus, there is more selling of the stock. Yet, another reason that even a dividend-focused ETF could present more risks. At the moment, I don’t know if any Dividend Aristocrats have had their dividends slashed or not.

I think before this is over, the Corona crash will prove that Dividend Investing is NOT innately safer. It has risks just like everything else. I say this as someone who has already had TWO dividend cuts (Darden Restaurants and Ryman Hospitality Properties). There is NOTHING wrong with Dividend Investing; however, I don’t think to focus solely on it or even heavily making that your deciding factor when investing is a smart idea, even during bear markets.

Page 1 of 3

Powered by WordPress & Theme by Anders Norén