Anyone researching Abercrombie & Fitch Co. (NYSE:ANF) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.
Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated 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 below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.
What does ANF’s beta value mean to investors?
Given this level of beta, 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 Abercrombie & Fitch fares in that regard, below.
Could ANF’s size cause it to be more volatile?
With a market capitalisation of US$1.1b, Abercrombie & Fitch is a small cap stock. However, it is big enough to catch the attention of professional investors.
What this means for you:
Abercrombie & Fitch 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. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Abercrombie & Fitch’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 ANF’s future growth? Take a look at our free research report of analyst consensus for ANF’s outlook.
- Past Track Record: Has ANF 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 ANF’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how ANF measures up against other companies on valuation. You could start with this free list of prospective options.
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