With great volatility comes great risk but also amazing opportunities. The market is currently significantly more volatile than it has been for a decade. A lot of stocks, even full sectors, are not following the TSX’s recovery pace and pattern, which is increasing volatility even more.
How long is this likely to continue? This is a tough question to answer. Sure, the TSX rallied, and many companies and the stock market in general are moving towards recovery, and there hasn’t been any significant dip since the last one in March. But the pandemic isn’t over yet — far from it. The probability of a vaccine coming out before the year is over is just as high as a second wave hitting the world.
If the latter happens first, the market is sure to dip again. And based on the intensity of the crash, the new “crater” in the TSX index might be much deeper than it was in March. If a vaccine is successfully developed and effectively deployed, the recovery might be more rapid.
Investing in volatility
Warren Buffett’s quote, “be fearful when others are greedy and greedy when others are fearful,” is relevant in the current scenario. Many conservative investors are afraid to make a move in a highly volatile market.
Though long-term buy-and-hold investors understand that volatility is a natural part of the stock market, and it tends to move erratically sometimes, entering a highly volatile market is not something many of them feel comfortable doing.
But for all its flaws and the confusion it sprouts, a volatile market might also present some amazing opportunities. If you are sure that you can “read” a company effectively, and judge whether or not it’s a good long-term prospect, you can use volatility in your favour.
One volatile stock
One very volatile stock right now is BRP (TSX:DOO). It has a five-year beta of 3.33. Despite a weak balance sheet, where its total liabilities outweigh its total assets by about $600 million, the stock is overvalued. It has a price-to-book ratio of 29.4, and it’s currently trading at a price to earnings of 29.7 times.
Its quarterly revenue generation has been consistent, and its return on equity, while still in the negative territory, has improved significantly from the last quarter. BRP is a $5 billion company that creates specialized vehicles for mobility on snow, water, dirt, and air. The company has 10 different brands working under its name. It was once part of Bombardier, but the parent company sold its recreational vehicle part in 2003, which became BRP.
It doesn’t pay dividends, but it’s still cherished by investors thanks to its capital growth potential. Its five-year CAGR is 15%, and it’s currently trading at about 23% discount from its pre-crash value.
Foolish takeaway
High volatility isn’t a very desirable attribute, especially if the balance sheet looks a bit shaky, but this is the kind of risk many investors are willing to take to add some growth in their portfolios. Still, volatile investments should be evaluated with much more scrutiny to mitigate the risk as much as possible.
