4 Long-Term Buying Opportunities in the Midst of Elevated Volatility

Updated: Nov 8

Introduction

Following the article about the edge of buying equities in high-volatility environments, especially for minimum-volatility stocks, it's time to dig deeper into the best 24 stocks on our premium watchlist. That's the number of stocks that are currently ranked among the 10% best stocks in the US stock market universe, on a fundamental and momentum basis. Moreover, we always seek consistent long-term leaders, not the ones that cyclically under-or outperform the broader market. I'm also going to share four top picks that are worth checking out in either a high VIX environment or normal VIX (15%-20%) environment.


24 Best US Stocks

Absolute returns

As expected, the absolute returns are stellar if one buys the elite performers when the VIX shoots through the roof. But even in normal VIX environments, the whole basket of the best long-term winners generates returns similar to those realized after a surge in the VIX. The discrepancy is, however, much bigger on a short-term time frame.

(Source: Option Generator Research)


Sharpe Ratio

Double-digit returns are great, but achieving consistent returns and thus the portion of risk-taking is even more relevant. This is specially true when utilizing portfolio overwriting (covered call writing on a monthly basis, usually out-of-the-money calls) which benefits from stable/bullish price action. Based on my empirical study, the risk/reward profile is skewed extremely positively for VIX >25%. While there are some disconnects between individual stocks that the watchlist is made up of, buy and hold positions entered in elevated VIX environments yield a far better Sharpe ratio.

At first sight, this seems unquestionably logical, but why is everybody selling out during corrections at a time the risk compared to the return is the lowest for new long-term positions?

(Source: Option Generator Research)


Let's take a closer look at 4 stocks which I believe are set to soar in a normalizing VIX, high VIX and all circumstances environment.


1) VEEVA: Extremely Positive Sharpe Ratio and Absolute Returns During High VIX Environments

Statistics

VEEVA stands out from the rest when it comes to buying this name into VIX strength. Not only do we achieve a far higher absolute return, the risk-adjusted returns are outstanding for a high-growth company of this size. The Sharpe Ratio on a forward 1-year return basis is 5 times greater when buying into VIX strength (25+ %) compared to all circumstances. VEEVA Systems is therefore the ultimate "Buy the Dip" company.

(Source: Option Generator Research)

(Source: Option Generator Research)


Technical analysis

After having consolidated between $142 and $177, the chart technicals are very bullish with a recent breakout to $192. The Directional Movement Index underpins the robust uptrend as does the up-crossing MACD. It's not unrealistic that shares hit the $250 mark in April 2021, based on the empirical research. Adding some out-of-the-money covered calls to the equation and there's a huge opportunity to achieve a 70+% total return over the next year.

(Source: Pro Real Time)


2) American Tower: Consistently Outperforming the Broader Market

Statistics

Just like with VEEVA, American Tower has proven itself capable of delivering significant alpha during times of elevated volatility, not to mention the consistently rock-solid returns in all circumstances. The Sharpe Ratio in high-VIX environments crushes every other stock on the watchlist, because of the consistency in the forward returns when the VIX hit 25+ % (like in February 2018, December 2018, August 2015). As a result, there's more upside potential for this Cell Tower REIT. It matches every aspect of covered call writing, as highlighted in this in-the-money covered writing article.

(Source: Option Generator Research)

(Source: Option Generator Research)


Technical analysis

The Directional Movement Index underpins the robust uptrend as does the MACD, which hasn't seen a downcross so far despite the coronavirus market crash. American Tower shares tend to see long periods of consolidation before breaking out. That is exactly what's about to happen in the next couple of months. Consequently, it's not unrealistic that shares hit the $320 mark in April 2021, based on the empirical research.

(Source: Pro Real Time)


3) Chemed Corporation: Wait for Volatility Contraction to Embark on this Long-Term Leader

Statistics

Contrary to other stocks, CHEMED should be purchased after a sharp increase in the VIX, between 15% and 25%. Stated differently, VIX readings above 25% are not a positive for forward buy-and-hold returns in CHEMED, at least on a 3- and 6-month basis. Wait for the VIX to come down before entering this great long-term growth company.

(Source: Option Generator Research)

(Source: Option Generator Research)


Technical analysis

Despite the positive Direction Movement Index, we have recently seen a MACD downcross. Based on both the empirical VIX study and the past monthly chart technicals, CHEMED is full of opportunity after finishing a multi-month (year) consolidation and showing an up-cross in the MACD, as was the case in 2017 and 2019. Based on the backwardation in the VIX futures, a powerful breakout in CHEMED shares could take place this summer.

(Source: Pro Real Time)


4) MSCI: An All-Rounder

Statistics

And last but not least, looking for an all-rounder in all VIX circumstances I picked MSCI. This company benefits from secular growth trends in the investment and data-analytics industry.

(Source: Option Generator Research)


Its Sharpe Ratio is superior in high-VIX environments on a 3- and 6-month basis, whereas buying MSCI into 15+% VIX readings yields roughly the same risk-adjusted returns on a forward 1-year time frame.

(Source: Option Generator Research)


Technical analysis

MSCI has seen several short-lived consolidations over the past two years and it's a matter of time before shares start breaking out to $400. The MACD is well above the signal line as is the Directional Movement Index. A new impulse in the DMI, however, is required to fuel the next multi-month uptrend.

(Source: Pro Real Time)


Conclusion

I presented 4 buying opportunities based on the VIX readings. If you're interested in learning how to master our methodology, go the "Pricing" tab, become a premium member and schedule an online 1-on-1 investment meeting .

Option Generator AM

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