If you own shares in Advanced Drainage Systems, Inc. (NYSE:WMS) then it’s worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the market.
Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. Beta is a widely used metric to measure a stock’s exposure to market risk (volatility). Before we go on, it’s worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that ‘volatility is far from synonymous with risk.’ Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What we can learn from WMS’s beta value
Using history as a guide, we might surmise that the share price is likely to be influenced by market volatility going forward but it probably won’t be particularly sensitive to it. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Advanced Drainage Systems’s revenue and earnings in the image below.
Could WMS’s size cause it to be more volatile?
Advanced Drainage Systems is a reasonably big company, with a market capitalisation of US$2.1b. Most companies this size are actively traded with decent volumes of shares changing hands each day. It’s not overly surprising to see large companies with beta values reasonably close to the market average. After all, large companies make up a higher weighting of the index than do small companies.
What this means for you:
It is probable that there is a link between the share price of Advanced Drainage Systems and the broader market, since it has a beta value quite close to one. However, long term investors are generally well served by looking past market volatility and focussing on the underlying development of the business. If that’s your game, metrics such as revenue, earnings and cash flow will be more useful. In order to fully understand whether WMS is a good investment for you, we also need to consider important company-specific fundamentals such as Advanced Drainage Systems’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Future Outlook: What are well-informed industry analysts predicting for WMS’s future growth? Take a look at our free research report of analyst consensus for WMS’s outlook.
- Past Track Record: Has WMS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of WMS’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how WMS measures up against other companies on valuation. You could start with this free list of prospective options.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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