Assessing the Volatility of Nutrition Stocks

Despite a major blow to the stock market in mid-September, nutrition stocks held their own.

ByAdam Ismail

The 500-point jolt that shook the stock market on September 15th scared a lot of people, prompting many of them to believe that an even larger stock market crash was imminent due to poor economic conditions and the ongoing credit crunch. When the markets become this volatile, growth companies and industries are often even more volatile. With the nutrition industry steadily growing much faster than the general economy, does this make nutraceuticals a growth industry as well? And if so, how damaging could a stock market crash be to nutraceutical stocks?

Growth industries are often more volatile than stock indices because they are supposed to cover a large universe of stocks, including companies from both stable and unstable industries. So while the whole market may be going down, individual sectors may take more of the brunt. Also, valuations are based entirely on future growth prospects, so the higher the growth prospects, the higher the valuation will be. This means that a 1% drop in sales will hit shares of a growth company harder than a 1% drop of something more stable, like a utility company. One way to measure this is by looking at a stock’s “beta”—a measure of how volatile a stock is compared to the general market. A beta of 1.0 means a stock will probably have the same volatility as the general market, whereas a beta of 2.0 would mean a stock has twice the volatility. One caveat to note: if a stock has a beta of -1.0, this means it will still have the same volatility as the market, but by being negative it indicates that the stock will move in the opposite direction of the market.

So how do nutritional stocks stack up to the general market in terms of volatility? Surprisingly, nutraceutical companies overall are less volatile than the broader market. In fact,com­panies such as NBTY, Usana Health Sciences, NuSkin, Martek Biosciences, and Herbalife are all less volatile than the market. The notable exceptions seem to operate on the natural and organic food side, where you see companies like Hain Celestial, UNFI and Hansen Natural with betas nearly double that of the general market. (See Table 1.)

So when the Dow index fell 500 points in September, or 4.4%, how did nutraceutical stocks fare? Interestingly, every one of the major publicly traded companies in the nutrition industry performed better than the general market that day. This would indicate that if the market were to crash for the same reasons that made it drop on September 15th, stocks in the nutrition industry may actually fare better than the general market. It may also mean that the market does not consider nutraceuticals a growth industry. Betas are a backwards-looking measurement, usually spanning 36 months. And certainly in the past nutraceuticals have not behaved like growth stocks.

Another way to “look into the fu­ture” is to see what the options market thinks. A component of options pricing is the implied volatility over the life of the option, so you can take the implied volatility of the underlying stock and compare it to the implied volatility of the overall market to see how the options traders view future volatility. In the case of nutrition stocks, actually, the market believes nutrition shares WILL be more volatile than the general stock market in the future. And what is even more interesting is that this held true prior to the 500-point drop in the Dow, even though when the big drop came nutrition shares were less volatile.

The market DOES believe nutraceuticals is a growth industry, but shares have not behaved like it recently. That is not a bad thing. Growth stocks are attractive because they offer a higher potential return, but the downside is they also offer more risk. So while nutraceutical stocks have seemingly behaved with less risk in the recent past, there is no guarantee they will do so in the future.NW