Enquistock: Stock volatility and recommendations

I recently received a few calls from our readers seeking advice on a few stocks whose share prices suddenly started rising very sharply. Many inquiries were related to Delta Electronics, Hana Electronics, Do Home, and Sri Trang Gloves.

This led me to investigate the volatility of share price.

What is Volatility?

For those not familiar with the technical aspect of the measure volatility. The term suggests volatility, which refers to swings in the price of security, index or commodity.

In the securities markets, volatility is often measured as either the standard deviation or variance between returns from that same security or market index.

Volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a “volatile” market. In most cases, the higher the price swings, i.e. volatility, the riskier the security.

Why? Because the direction of large price swings can dramatically reverse over a short time period.

If the swings go in the direction an investor’s bet, large gains may happen in quick time. However, these gains can dramatically disappear in an equally short term as well. Prices will fall, even though it is with same magnitude as the price rise, which cause losses. For example, a 10% rise followed by a 10% fall means an investor holding a security with cost of 100 baht has lost 1%.  

A lower volatility means that a security’s value does not fluctuate dramatically and tends to be steady.

What is relative Volatility?

The price swings are less meaningful if looked at in isolation, as the price movements may be caused by factors that affect most stocks in a country, sector, or an index. In the investment world, volatility is measured in relative terms – relative being the index here is called Beta.

Beta approximates the overall volatility of a security’s returns against the returns of a relevant benchmark, say SET Index for Thailand stocks. Beta values are more than 1 for volatile stocks and less than one for low volatility stocks. For example, a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the benchmark, based on price level. Conversely, a stock with a beta of 0.9 has historically moved 90% for every 100% move in the underlying index.

What is Index Volatility?

An Index volatility is the same as a security volatility with the underlying being the index.

For certain global indices, there are indexes of volatility. For example, a VIX index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500® Index, and is calculated by using the midpoint of real-time S&P 500® Index (SPX) option bid/ask quotes.

What is Historical and Expected or Implied Volatility?

Without dwelling too much into the topic of volatility, the last thing our readers must understand is that volatility is calculated based on historic data. Volatility does not stay constant, and changes due to many factors – therefore a measure of expected or implied volatility using statistical tools is estimated.

Returning to this week’s topic of volatility in Thailand stocks, I looked at the historical volatility of 20 days, which reflects recent moves, and 260 days, relative long-term measure. I limited the analysis to the companies with market cap of more than 20 million baht as small cap companies show irrational patterns. 

Table below shows the volatility of 52-week high price, lifetime high price, and price changes this month.

A few observations

DELTA, which was removed from SET100 Index recently due to poor stock liquidity, was the most volaitile stock with 20D Vol of 95. Its share price reached 52 week high and a lifetime high of 125 baht on 31 July.

Eight stocks reached lifetime high in the last six weeks – DELTA, DO Home, JMT, Sri Trang Gloves (STGT), TQM Corp (TQM), Siam Global (GLOBAL), COM7, and Carabao (CBG).

In the last four weeks, at least 11 stocks became more volatile than their 260d average. These are DELTA, DOHOME, HANA, STA, JMT, Polyplex (PTL), TIPCO Asphalt (TASCO), Airports Authority of Thailand (AOT)*, Minor International (MINT)*, Bangkok Life (BLA)*, CK Power (CKP)*

The bottom five stocks with the least 20d vol are Saha Pathana (SPI), Kiatinakorn Bank (KKP), BTS Infrastructure (BTSGIF), Impact Growth Fund (IMPACT), and Supalai (SPALI). These names are not in the table above.

Should you buy stocks that have just reached lifetime high?

As a rule of thumb, investors should stay away from any stock that has just reached lifetime high. This is because fundamentals of a company do not change rapidly or forever.

Many of the stocks on this list have risen to peak on assumptions that the coronavirus outbreak has either changed their business outlook forever or that they were hidden gems and the outbreak has led investors to discover them. Most of the impact – seen in profit surge or sentiment change – is short lived.

In medium term, forces of demand supply change and law of regression comes to play – causing sever corrections.

There are a few exceptions to this, however. The companies with long term standings, and those which adapt to changes very quickly can do better for years to come. The changes however do not happen and lifetime highs are set in quick succession. A few names which have proven long term track record are CPALL, MAKRO, ADVANC, and PTT. These stocks didn’t set a new lifetime high each month, quarter, or even year.

Let’s discuss a few of the names which have touched lifetime high recently – amidst the coronavirus outbreak.

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