The Industrials Sector is on a Tear

 The Vanguard Industrials Index ETF (VIS) touched a 52-week high of $202.86 on Friday, June 16 (Exhibit 1).  

Exhibit 1:

Vanguard Industrial Index ETF (VIS) 5-Day Performance
Source: Seeking Alpha

The top performer in this ETF was Vertiv Holdings, returning 133% over the past year (as of June 16, 2023). The company describes itself as follows:

"Vertiv is a global leader in the design, manufacturing and servicing of critical digital infrastructure for data centers, communication networks, and commercial and industrial environments. Our customers operate in some of the world's most critical and growing industries, including cloud services, financial services, healthcare, transportation, manufacturing, energy, education, government, social media, and retail." (Source: SEC.GOV)

This renewed interest in data centers is not surprising, given the popularity of artificial intelligence (AI) and the investments in new applications powered by AI. 

In the Q1 2023 Earnings call, Vertiv's management said the following about AI:

"We are distinctly seeing the first signs of the AI investment cycle in our pipelines and orders. Vertiv is uniquely positioned to win here, given our market leadership and deep domain expertise in areas like thermal management and controls, which are vital to support the complexity of future AI infrastructures." (Source: Seeking Alpha)

"Let me go back to the investments in AI. You may have heard it as generally characterized as the next infrastructure arms race, Vertiv benefits from this race and is an agnostic partner of choice to the risk participants. The acceleration in investment in AI will turn into a net infrastructure capacity demand acceleration, and this starts to be visible in our pipeline. AI applications’ demand and net capacity increase in the industry, higher power density, a gradual migration to an air and liquid hybrid cooling environment and a transition to liquid-ready facility designed." (Source: Seeking Alpha)

 Here's the list of the top 10 performers in the Vanguard Industrials Index ETF over the past year (Exhibit 2).  

Exhibit 2:

Top 10 Performers in the Vanguard Industrials Index ETF
Source: Barchart.com, Data Provided by IEX Cloud

 Here's the list of the bottom 10 worst performers in the Industrials ETF over the past year (Exhibit 3):

Exhibit 3:

Bottom 10 Worst Performers in the Vanguard Industrials Index ETF
Source: Barchart.com, Data Provided by IEX Cloud

The Chemours Company had a fantastic start to 2023

The Chemours Company is a diversified chemical company serving multiple industries. Here are its products:

Exhibit 1:

Here's the graph of the monthly returns of the Vanguard S&P 500 Index ETF and the Chemours Company:  

Exhibit 2:

Source: Data Provided by IEX Cloud, Graph Created Using Microsoft Excel and RStudio

The Chemours Company averaged a monthly return of 2.59% compared to a 1% return for the Vanguard S&P 500 Index ETF (Exhibits 3 & 4). 

Exhibit 3:

Source: Data Provided by IEX Cloud, Calculated Using Microsoft Excel

Exhibit 4:

Source: Data Provided by IEX Cloud, Calculated Using Microsoft Excel

A linear regression of the monthly returns of the Vanguard S&P 500 Index ETF and the Chemours Company estimates the beta (the coefficient of the Vanguard S&P 500 Index) as 1.82. Yahoo Finance estimates the beta as 1.88 based on five years of monthly returns.   

Here's the output from the linear model:  
 

Call:

lm(formula = CC_Monthly_Return ~ VOO_Monthly_Return, data = VOOandCC)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.23930 -0.07880  0.01016  0.07621  0.29157 

Coefficients:

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

(Intercept)        0.006698   0.018764   0.357    0.723    

VOO_Monthly_Return 1.825643   0.325520   5.608 1.45e-06 ***

---

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

Residual standard error: 0.1224 on 42 degrees of freedom

Multiple R-squared:  0.4282, Adjusted R-squared:  0.4146 

F-statistic: 31.45 on 1 and 42 DF,  p-value: 1.45e-06

The stock had a great January 2023 with a return of 18% compared to a 6.2% return of the Vanguard S&P 500 Index ETF.  

Here's the chart of the monthly returns of the Vanguard S&P 500 Index and the Chemours Company:

Exhibit 5:

Source: Data Provided by IEX Cloud, Calculated Using Microsoft Excel

Hormel Foods' Lower Returns than the Vanguard S&P 500 Index ETF

Hormel Foods own several iconic brands shown in the images below.  

Source: Hormel Foods Corporation

Hormel Foods (HRL) has averaged a lower monthly return than the Vanguard S&P 500 Index ETF (VOO). The company has averaged a monthly return of 46 basis points compared to 105 basis points for the Vanguard S&P 500 Index ETF (Exhibits 1& 2).     

Exhibit 1:

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

Exhibit 2:

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

A linear regression of the monthly returns of the Vanguard S&P 500 Index ETF and Hormel Foods yields a beta of 0.237.  

Here's the output from the linear regression model created using RStudio:

Call:

lm(formula = HRL_Monthly_Return ~ VOO_Monthly_Return, data = VOOandHRL)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.102639 -0.023972 -0.001719  0.022192  0.166993 

Coefficients:

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

(Intercept)        0.002084   0.008249   0.253    0.802

VOO_Monthly_Return 0.237144   0.143102   1.657    0.105

Residual standard error: 0.0538 on 42 degrees of freedom

Multiple R-squared:  0.06137, Adjusted R-squared:  0.03902 

F-statistic: 2.746 on 1 and 42 DF,  p-value: 0.1049

The p-value of 0.1 indicates that the relationship is insignificant at the 95% confidence interval.

Between June 2019 and January 2023, the monthly returns of the Vanguard S&P 500 Index ETF and Hormel Foods had a positive correlation of 0.24. But between September 2020 and August 2021, the correlation was a negative 0.13 (Exhibit: 3). This was when stocks such as Apple, Microsoft, Amazon, and Tesla went on an epic, once-in-a-lifetime run into the trillion-dollar club in terms of market capitalization. Consumer staples stocks such as Hormel Foods went out of favor during this period, dropping 10.8%. 

Exhibit 3:

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

Hormel Foods may be the perfect stock to own during a bear market. Its low volatility and, at times, negative correlation with the S&P 500 Index means it performs well when the markets perform poorly.  
 

     

Clorox's Poor Average Monthly Returns

Clorox makes household products such as wipes, sprays, and bleach (Exhibit 1). 

Exhibit 1: 

Source: Clorox Website

Over the past decade, Clorox has underperformed compared to the S&P 500 Index. An analysis of the monthly returns of Clorox and the Vanguard S&P 500 Index ETF between June 2019 and January 2023 shows that Clorox continued its poor performance. Clorox's monthly return averaged 0.1%, while the Vanguard S&P 500 Index returned 1% (Exhibits 2 & 3). Even the third quartile average monthly return of 3.2% of Clorox fell below the 4.8% returned by the Vanguard S&P 500 Index ETF (Exhibits 2 & 3).  

Exhibit 2:

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

Exhibit 3:

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

The monthly returns of Clorox and the Vanguard S&P 500 Index ETF between June 2019 and January 2023 show a low correlation of 0.24. 

A rolling correlation of the monthly returns conducted using RStudio shows a low positive correlation of 0.02 between August 2020 and July 2021 (Exhibit 4). 

Exhibit 4:

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

 A linear regression of the monthly returns shows a very low beta of 0.25 for Clorox. But, the p-value of 0.1 shows that the relationship may not be significant at the 95% confidence interval.  

Call:

lm(formula = CLX_Monthly_Return ~ VOO_Monthly_Return, data = VOOandCLX)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.141038 -0.033613  0.000236  0.036959  0.120780 

Coefficients:

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

(Intercept)        -0.001581   0.008864  -0.178    0.859

VOO_Monthly_Return  0.252497   0.153777   1.642    0.108

Residual standard error: 0.05781 on 42 degrees of freedom

Multiple R-squared:  0.06032, Adjusted R-squared:  0.03795 

F-statistic: 2.696 on 1 and 42 DF,  p-value: 0.1081 

Here's the graph of the monthly returns of the Vanguard S&P 500 Index ETF and Clorox (Exhibit 5) and the residuals plot from the linear regression (Exhibit 6).

Exhibit 5:   

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

Exhibit 6:

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

  
 

     

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

 

 

  

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

J.M. Smucker's Low Correlation With The Vanguard S&P 500 Index ETF

 J.M. Smucker is known for its iconic and timeless consumer staples brands (Exhibit 1). 

Note: Click on each image in this blog post to view an enlarged version

Exhibit 1:

Brands Owned by J.M. Smucker & Co. (Source: J.M. Smucker)

Here's the histogram of monthly returns for J.M. Smucker between June 2019 and November 2022 (Exhibit 2).

Exhibit 2:

J.M. Smucker (SJM) Histogram of Monthly Returns (Source: Data provided by IEX Cloud, author calculations & graph using Microsoft Excel)

The average monthly return for J.M. Smucker is less than the Vanguard S&P 500 Index ETF (Exhibit 3).

Exhibit 3:

 J.M. Smucker Monthly Return Statistics - Average, First Quartile, Third Quartile, Standard Deviation, Highest Monthly Return, Lowest Monthly Return (Source: Data provided by IEX Cloud, author calculations & graph using Microsoft Excel)

J.M. Smucker had a lower standard deviation than the Vanguard ETF during this period (Exhibit 4). A company with a lower standard deviation than the well-diversified ETF, a measure of volatility, is an infrequent occurrence. 

Exhibit 4:

Vanguard S&P 500 Index ETF Monthly Return Statistics - Average, First Quartile, Third Quartile, Standard Deviation, Highest Monthly Return, Lowest Monthly Return (Source: Data provided by IEX Cloud, author calculations & graph using Microsoft Excel)

Here's a graph of the monthly returns of the Vanguard ETF (x-axis) and J.M.Smucker (y-axis) with the fitted regression line (Exhibit 5).

Exhibit 5:

Monthly Return Graph of the Vanguard S&P 500 Index ETF and J.M. Smucker (Source: Data provided by IEX Cloud, author calculations & graph using Microsoft Excel & RStudio) 

The correlation of the monthly returns between June 2019 and November 2022 between the Vanguard ETF and J.M. Smucker is a low 0.19 (Exhibit 5). The fitted linear regression line has a p-value of 0.23, indicating that the relationship is insignificant at the 95% confidence interval. 

The fitted linear regression line has a p-value of 0.23, indicating that the relationship is insignificant at the 95% confidence interval. Here's the output from the linear regression:

> summary(lmVOOSJM)

Call:

lm(formula = SJM_Monthly_Return ~ VOO_Monthly_Return, data = VOOandSJM)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.089842 -0.034389  0.002403  0.022171  0.118077 

Coefficients:

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

(Intercept)        0.005011   0.007476   0.670    0.507

VOO_Monthly_Return 0.157911   0.130216   1.213    0.232

Residual standard error: 0.04755 on 40 degrees of freedom

Multiple R-squared:  0.03546, Adjusted R-squared:  0.01135 

F-statistic: 1.471 on 1 and 40 DF,  p-value: 0.2324

The beta for J.M. Smucker is 0.15, but the high p-value is a concern. This beta (the coefficient of VOO_Monthly_Return) may not be the true value. Yahoo Finance has calculated a beta of 0.24.    

  

Eastman Chemical's Monthly Returns Have a High Correlation with the Vanguard S&P 500 Index ETF

Here's the histogram of monthly returns for Eastman Chemical (EMN) between June 2019 and November 2022 (Exhibit 1). Please click on the image to see an enlarged version.  

Exhibit 1:

Eastman Chemical Histogram of Monthly Returns (Source: Data Provided by IEX Cloud, Author Calculations using Microsoft Excel)

  The average monthly returns of Eastman Chemical are slightly better than that of the Vanguard S&P 500 Index ETF (Exhibit 2 & 3). But Eastman Chemical has a much higher (nearly double) standard deviation (volatility) of monthly returns than the Vanguard S&P 500 Index ETF.       

Exhibit 2:

Eastman Chemical Average, First Quartile, Third Quartile, and Standard Deviation of Monthly Returns. (Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel)

Exhibit 3:

Vanguard S&P 500 Index ETF Average, First Quartile, Third Quartile, and Standard Deviation of Monthly Returns. (Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel)

Eastman Chemical moves closely with the market since it has a high positive correlation of 0.78.

> cor(VOOandEMN['EMN_Monthly_Return'], VOOandEMN['VOO_Monthly_Return'], method = c("pearson", "kendall", "spearman"))

                      VOO_Monthly_Return

EMN_Monthly_Return          0.7898654

A linear regression model of the monthly returns of Vanguard S&P 500 Index ETF as the independent variable and Eastman Chemical as the dependent variable yields a beta of 1.54.  

> # Conduct the Linear Regression of the Monthly Returns Between $VOO and $EMN

> lmVOOEMN = lm(EMN_Monthly_Return~VOO_Monthly_Return, data = VOOandEMN)

> # Present the summary of the results from the linear regression

> summary(lmVOOEMN)

Call:

lm(formula = EMN_Monthly_Return ~ VOO_Monthly_Return, data = VOOandEMN)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.12433 -0.04969 -0.01148  0.05611  0.13701 

Coefficients:

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

(Intercept)        -0.003992  0.010914   -0.366  0.716    

VOO_Monthly_Return  1.548548  0.190108    8.146  5.02e-10 ***

---

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

Residual standard error: 0.06942 on 40 degrees of freedom

Multiple R-squared:  0.6239, Adjusted R-squared:  0.6145 

F-statistic: 66.35 on 1 and 40 DF,  p-value: 5.023e-10

The coefficient of VOO_Monthly_Return (slope of the regression line) is the stock's beta. This beta value means that for every 1% change in the monthly returns of the Vanguard S&P 500 Index ETF, Eastman Chemical, on average, changes by 1.54% (monthly). This relationship between the two companies is significant at the 95% confidence interval, given the p-value of 5.02e-10.

This close positive relationship between the two explains why Eastman Chemical has lost 25.6%, while the Vanguard S&P 500 Index ETF (VOO) has lost 14.5%.    

 

Monthly Return Analysis of Conagra Brands

Conagra Brands owns many iconic brands in the food business (Exhibit 1). The company is categorized as a consumer staple. 

Exhibit 1:

 

Here's the histogram of monthly returns of Conagra Brands between June 2019 and November 2022 (Exhibit 2). Please click on the image to see an enlarged version.  

Exhibit 2:

Conagra Brands Histogram of Monthly Returns (Source: Data Provided by IEX Cloud, Author Calculations using Excel)

The average monthly returns of Conagra Brands (Exhibit 3) are very similar to that of the Vanguard S&P 500 Index ETF (Exhibit 4).

Exhibit 3: 

(Source: Data Provided by IEX Cloud, Data Calculations Using Excel)

Exhibit 4:

(Source: Data Provided by IEX Cloud, Data Calculations Using Excel)

The monthly returns of Conagra Brands and the Vanguard S&P 500 Index ETF have a mild positive correlation of 0.27 (Exhibit 5). 

Exhibit 5:  

A 12-month rolling correlation of the monthly returns yielded a very high positive correlation of 0.8 between April 2020 and March 2021 (Exhibit 6).

Exhibit 6:

(Source: Data Provided by IEX Cloud, Correlation Calculations Using RStudio)

A 12-month rolling correlation of the monthly returns yielded the highest negative correlation of 0.37 between July 2021 and June 2022 (Exhibit 7).

Exhibit 7:

(Source: Data Provided by IEX Cloud, Correlation Calculations Using RStudio)

A linear regression model estimates Conagra's Beta at 0.34, which is not statistically significant at the 95% confidence interval. The p-value is 0.083, suggesting that the correlation is not statistically significant.

Here's the output of the linear model:

Call:

lm(formula = CAG_Monthly_Return ~ VOO_Monthly_Return, data = VOOandCAG)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.168638  -0.044057  -0.004737   0.045175  0.170379 

Coefficients:

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

(Intercept)        0.007141   0.011079   0.645   0.5229  

VOO_Monthly_Return 0.342593   0.192981   1.775   0.0835 .

---

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

Residual standard error: 0.07047 on 40 degrees of freedom

Multiple R-squared:  0.07303, Adjusted R-squared:  0.04986 

F-statistic: 3.152 on 1 and 40 DF,  p-value: 0.08346

The adjusted R-squared is 0.049, meaning that just 4.9% of Conagra's monthly returns can be explained by the monthly returns of the Vanguard S&P 500 Index ETF.