If you’re interested in Power Integrations, Inc. (NASDAQ:POWI), 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 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 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. 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 POWI’s beta value tells investors
Zooming in on Power Integrations, we see it has a five year beta of 1.29. 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, Power Integrations shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Power Integrations fares in that regard, below.
How does POWI’s size impact its beta?
Power Integrations is a reasonably big company, with a market capitalisation of US$2.5b. Most companies this size are actively traded with decent volumes of shares changing hands each day. It has a relatively high beta, suggesting it may be somehow leveraged to macroeconomic conditions. For example, it might be a high growth stock with lots of investors trading the shares. It’s notable when large companies to have high beta values, because it usually takes substantial capital flows to move their share prices.
What this means for you:
Since Power Integrations 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. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Power Integrations’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 POWI’s future growth? Take a look at our free research report of analyst consensus for POWI’s outlook.
- Past Track Record: Has POWI 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 POWI’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how POWI 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 firstname.lastname@example.org. 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.