How Cavco Industries, Inc. (NASDAQ:CVCO) Can Impact Your Portfolio Volatility

September 01, 2019

If you're interested in Cavco Industries, Inc. (NASDAQ:CVCO), 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. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. 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. 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.

View our latest analysis for Cavco Industries

What CVCO's beta value tells investors

Zooming in on Cavco Industries, we see it has a five year beta of 1.58. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. If this beta value holds true in the future, Cavco Industries shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Cavco Industries's revenue and earnings in the image below.

NasdaqGS:CVCO Income Statement, September 2nd 2019

Could CVCO's size cause it to be more volatile?

With a market capitalisation of US$1.7b, Cavco Industries is a small cap stock. However, it is big enough to catch the attention of professional investors. It's not particularly surprising that it has a higher beta than the overall market. That's because it takes less money to influence the share price of a smaller company, than a bigger company.

What this means for you:

Since Cavco Industries tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether CVCO is a good investment for you, we also need to consider important company-specific fundamentals such as Cavco Industries’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 CVCO’s future growth? Take a look at our free research report of analyst consensus for CVCO’s outlook.
Past Track Record: Has CVCO 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 CVCO's historicals for more clarity.
Other Interesting Stocks: It's worth checking to see how CVCO measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.