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. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is 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 WMS’s beta value mean to investors?
With a beta of 0.96, (which is quite close to 1) the share price of Advanced Drainage Systems has historically been about as voltile as the broader market. If the future looks like the past, we could therefore consider it likely that the stock price will experience share price volatility that is roughly similar to the overall market. 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 Advanced Drainage Systems fares in that regard, below.
Could WMS’s size cause it to be more volatile?
Advanced Drainage Systems is a fairly large company. It has a market capitalisation of US$2.6b, which means it is probably on the radar of most investors. We shouldn’t be surprised to see a large company like this with a beta value quite close to the market average. Large companies often move roughly in line with the market. In part, that’s because there are fewer individual events that are signficant enough to markedly change the value of the stock (compared to small companies, at least).
What this means for you:
Advanced Drainage Systems has a beta value quite close to that of the overall market. That doesn’t tell us much on its own, so it is probably worth considering whether the company is growing, if you’re looking for stocks that will go up more than the overall market. 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 urge you to continue your research by taking a look at 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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