Does investing in funeral related companies provide a potential hedge to Covid-19? Some financial advisors and investors may expect these companies to outperform when deaths are increasing because it would increase the demand for services and products of these companies. We will take a look at four publicly traded funeral companies and analyze their performance year-to-date using the MacroRisk Analytics® platform.
The four funeral related companies that will be analyzed in this post are shown below.
First, let us take a look at the performance of the four funeral companies versus the S&P 500 Total Return Index from December 31, 2019 through November 23, 2020.
We can see that the stocks of the four companies have underperformed the S&P 500 TR Index (the bolded light blue line) during this time period. During March of 2020, the stocks, except STON, fell somewhat similarly to the market. However, the stocks have not recovered as quickly as the S&P 500 TR Index since then.
Down-market and Up-market Betas
The down-market beta measures the downside risk of an asset. It helps understand what happens to the asset when the benchmark goes down. A down-market beta less than one means that the asset tends to lose less value than the benchmark when the benchmark goes down.
The up-market beta measure the upside “risk,” or the “risk” of earning money. It shows what happens to the asset when the benchmark goes up. A value less than one means that the asset does not go up as much as the benchmark.
The down-market and up-market betas for the four companies are shown below. These are calculated using the past 11 months of daily returns as of November 23, 2020 (i.e., year-to-date).
All of the down-market betas are less than one demonstrating that the stocks of these companies lost less value than the S&P 500 TR Index when the index went down. To help interpret the down-market beta, consider the down-market beta of 0.5476 for StoneMor Partners. This means that over the period of analysis, if the S&P 500 TR Index goes down by one percent, the stock goes down by 0.5476% on average. Or, if the index goes down by 10%, the stock is expected to go down by 5.476%.
All of the up-market betas are also less than one meaning that the stocks did not go up as much as the index when the index had its up days. The up-market beta for StoneMor was even negative meaning that when the S&P 500 Index went up, the stock lost value.
Yes, on the days when the S&P 500 was down, the stocks lost less value than the index. However, to act as a hedge against a market driven by the Covid-19 developments, more downside protection is expected (lower down-market betas), or even negative down-market betas are preferred. Negative down-market betas would be situations when a stock increases when the S&P 500 goes down.
In this post, four funeral companies were analyzed to determine if they could be invested in as a potential hedge against Covid-19. The logic behind this notion is that there could be more deaths due to Covid-19 which would increase the demand for services and products provided by these funeral related companies.
Given the performance of the companies in 2020 and their down-market and up-market betas, these companies do not seem to be good hedges against the market that has been partially driven by Covid-19 developments. The companies actually underperformed the S&P 500 Total Return Index and did not exhibit strong downside protection from December 31, 2019 through November 23, 2020.
This kind of analysis is possible thanks to MacroRisk Analytics. The platform provides economic analysis of portfolios and thousands of individual companies, ETFs, mutual funds, etc. because The Economy Matters®.