If you’re interested in Federal Agricultural Mortgage Corporation (NYSE:AGM), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. 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 sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks are more sensitive to general market forces than others. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said ‘volatility is far from synonymous with risk’ in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
What does AGM’s beta value mean to investors?
Looking at the last five years, Federal Agricultural Mortgage has a beta of 1.18. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. Based on this history, investors should be aware that Federal Agricultural Mortgage are likely to rise strongly in times of greed, but sell off in times of fear. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Federal Agricultural Mortgage fares in that regard, below.
How does AGM’s size impact its beta?
Federal Agricultural Mortgage is a small company, but not tiny and little known. It has a market capitalisation of US$875m, which means it would be on the radar of intstitutional investors. It has a relatively high beta, which is not unusual among small-cap stocks. Because it takes less capital to move the share price of a smaller company, actively traded small-cap stocks often have a higher beta that a similar large-cap stock.
What this means for you:
Beta only tells us that the Federal Agricultural Mortgage share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there’s plenty more to learn. In order to fully understand whether AGM is a good investment for you, we also need to consider important company-specific fundamentals such as Federal Agricultural Mortgage’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for AGM’s future growth? Take a look at our free research report of analyst consensus for AGM’s outlook.
- Past Track Record: Has AGM 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 AGM’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how AGM measures up against other companies on valuation. You could start with this free list of prospective options.
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