Change in Correlation of the Monthly Returns of Generac Holdings and the Vanguard S&P 500 Index ETF

Generac Holdings (GNRC) has a beta of 1.19 based on a linear regression model of the monthly returns of the Vanguard S&P 500 Index ETF (VOO) and Generac Holdings. The company's residential sales slowdown has pushed the stock lower over the past five months. The stock has dropped 55% compared to a 7% drop for the Vanguard S&P 500 Index ETF over the past year. This massive underperformance of the stock has led to a drop in the monthly return correlation of the Vanguard ETF and Generac Holdings.  

     Exhibit 1: A Generac Generator

Source: Generac Holdings Inc.

Here's the graph of the Vanguard S&P 500 Index ETF and Generac Holdings' monthly returns (Exhibit 2).  

Exhibit 2: Monthly Returns of the Vanguard S&P 500 Index ETF and Generac Holdings

Source: Data Provided by IEX Cloud, Author Calculations on Microsoft Excel, Graph Created on RStudio

The graph of the monthly returns also shows a correlation of 0.44 between the two equities.  

Here are the betas of some of the stocks I have covered over the past few months (Exhibit 3). 

Note: Click on each image to see an enlarged version. 

 

Exhibit 3: Beta of Various stocks in the consumer staples, consumer discretionary, and industrial sectors.   

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

Here's the output from the linear regression model:

Call:

lm(formula = GNRC_Monthly_Return ~ VOO_Monthly_Return, data = VOOandGNRC)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.46400 -0.09209  0.00221  0.10001  0.28690 

Coefficients:

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

(Intercept)         0.01733    0.02170   0.798  0.42915   

VOO_Monthly_Return  1.19915    0.37646   3.185  0.00273 **

---

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

Residual standard error: 0.1415 on 42 degrees of freedom

Multiple R-squared:  0.1946, Adjusted R-squared:  0.1754 

F-statistic: 10.15 on 1 and 42 DF,  p-value: 0.002726

The slope of the line is the beta for the stock. In this linear regression model, the co-efficient of VOO_MonthlyReturn (1.19915) is the beta for Generac Holdings. 

The monthly return statistics for Generac holdings show that the stock has a very high standard deviation of 15% in its monthly returns (Exhibit 4).

Exhibit 4: Generac Holdings Monthly Return Statistics [June 2019 - January 2023]    

Source: Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel

Here are the return statistics for the Vanguard S&P 500 Index ETF during the same period (Exhibit 5).

Exhibit 5: Vanguard S&P 500 Index ETF Monthly Return Statistics  [June 2019 - January 2023]  

Source: Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel

The Vanguard S&P 500 Index ETF and Generac Holdings' monthly returns had a high positive correlation of 0.72 between October 2021 and September 2022 (Exhibit 6).   

Exhibit 6: Monthly Return Correlation of the Vanguard S&P 500 Index ETF and Generac Holdings

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