Why is the stock of Goodyear Tire & Rubber Co. So Volatile?

Goodyear (GT) is a very volatile stock with a beta of 1.86, measured using a linear regression model. This linear regression model used monthly returns for Goodyear and the Vanguard S&P 500 Index ETF (VOO) from June 2019 to January 2023. This beta is one of the highest I have encountered among the stocks I cover (Exhibit 1).

Image: 90% Sustainable Material Demonstration Tire

Source: Goodyear Tire & Rubber Co.

The stock is heavily dependent on the discretionary spending of the consumer. In a downturn, car sales drop, thus affecting Goodyear's sales. The replacement tire sales also drop in an economic slowdown, affecting the company. These might be the reasons behind the high volatility.   

Note: Please click on the image to see an enlarged version.

Exhibit 1: Beta of Stocks in Industrial, Consumer Staples, Technology, and Consumer Discretionary Sectors  

Source: Data Provided by IEX Cloud, Author Calculations using Microsoft Excel & RStudio

Here's the output from the linear regression model:

Call:

lm(formula = GT_Monthly_Return ~ VOO_Monthly_Return, data = VOOandGT)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.21099 -0.10456 -0.01782  0.07052  0.55012 

Coefficients:

                    Estimate Std. Error t value Pr(>|t|)    

(Intercept)        -0.008481   0.021853  -0.388      0.7    

VOO_Monthly_Return  1.869864   0.379106   4.932 1.33e-05 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.1425 on 42 degrees of freedom

Multiple R-squared:  0.3668, Adjusted R-squared:  0.3517 

F-statistic: 24.33 on 1 and 42 DF,  p-value: 1.326e-05

The coefficient for "VOO_Monthly_Return" is the beta for the stock.  This coefficient is also the slope of the line.  The monthly returns of Goodyear have been plotted against the returns of the Vanguard S&P 500 Index ETF (Exhibit 2). Exhibit 3 shows the residuals from the linear regression mode. There is a solid positive monthly return correlation of 0.61 between the Vanguard ETF and Goodyear. There is also a significant relationship between the monthly returns of the Vanguard ETF and Goodyear, with a p-value of 1.3e-05.     

Exhibit 2: Monthly Returns Plot of the Vanguard S&P 500 Index ETF and Goodyear Tires

Source: Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel, and Graph Plotted Using RStudio

Exhibit 3: Residuals from the Linear Regression of the Vanguard S&P 500 Index ETF and Goodyear Tires Monthly Returns

Source: Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel, and Graph Plotted Using RStudio

Musings on Economic Growth, Buybacks, and Inflation

We are entering an era of slow growth, especially in the U.S. and Europe. The older demographics and lower productivity are to blame for the low growth. Economic growth was already slow in the 2010s, but artificially low-interest rates from the Fed caused multiple expansions in the stock market. I see these Asset Managers and VCs criticize the Fed and the Government for inflation today, but those guys did not give credit to the Fed and the Government for all the billions they made in profits due to the cheap money policies. Homeowners benefited from the artificially low-interest rates, but most would never call it a hand-out.

Business Insider is reporting that the corporate bond market is in deep trouble. CEOs spent $1 trillion on share buybacks each year to pad their income while their company's balance sheets deteriorated. Oracle spent over 85% of its operating cash flow on share repurchases. Even after all these buybacks, Oracle's stock is way down. No amount of financial engineering can save a company with zero revenue growth.

Oracle can afford buybacks, but many other companies were spending more than their operating cash flow on buybacks and dividends. Essentially, they borrowed money at ultra-low interest rates to fund their buybacks. Even after all these buybacks, Oracle's stock is way down. No amount of financial engineering can save a company with zero revenue growth.

The Biden administration should not bail out corporations for their mistakes and let companies go through the bankruptcy process for the way they mishandled shareholder wealth. We might see a wave of bankruptcies next year (2023). Let's return to our capitalist roots.  It was a mistake to bail out AIG with $170 billion during the 2008 crisis. We spent trillions bailing out corporations for their mistakes in both 2008 and again in 2020.  The US airlines went bankrupt in a week during March 2020.  The US airlines spent all their money on buybacks and had nothing saved for a rainy day. I saw this ad from a Japanese company during the 2020 COVID crisis. They asked applicants to apply to their company and said employees need not worry about getting paid.  They said they have enough money on their balance sheet to pay every employee even if they had zero revenues for 20 years.

Most of the inflation is caused by supply chain disruptions to food supplies and other essentials. No amount of lowering the money supply will reign in inflation caused by supply chain disruptions in food unless we want people to suffer from hunger.

Our problem will be slower economic growth and not inflation a year from now (2023). Inflation will be high compared to the 2010s, but it will settle at a much lower level than its current rate of 6% to 8%. Even this higher level will most likely be due to supply-side challenges. The money supply is already contracting rapidly.