Should You Be Concerned About Cathay General Bancorp’s (NASDAQ:CATY) Historical Volatility?

If you’re interested in Cathay General Bancorp (NASDAQ:CATY), 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. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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 is a widely used metric to measure a stock’s exposure to market risk (volatility). Before we go on, it’s worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that ‘volatility is far from synonymous with risk.’ Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is 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.

Check out our latest analysis for Cathay General Bancorp

What we can learn from CATY’s beta value

Given that it has a beta of 1.27, we can surmise that the Cathay General Bancorp share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Cathay General Bancorp 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 Cathay General Bancorp’s revenue and earnings in the image below.

NasdaqGS:CATY Income Statement, February 7th 2020
NasdaqGS:CATY Income Statement, February 7th 2020

Could CATY’s size cause it to be more volatile?

With a market capitalisation of US$3.0b, Cathay General Bancorp is a pretty big company, even by global standards. It is quite likely well known to very many investors. It takes a lot of money to influence the share price of large companies like this one. That makes it interesting to note that its share price has a history of sensitivity to market volatility. There might be some aspect of the business that means profits are leveraged to the economic cycle.

What this means for you:

Since Cathay General Bancorp 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 CATY is a good investment for you, we also need to consider important company-specific fundamentals such as Cathay General Bancorp’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for CATY’s future growth? Take a look at our free research report of analyst consensus for CATY’s outlook.
  2. Past Track Record: Has CATY 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 CATY’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how CATY 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 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.

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