Should You Be Concerned About Highland Gold Mining Limited’s (LON:HGM) Historical Volatility?

If you’re interested in Highland Gold Mining Limited (LON:HGM), 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. 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 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. 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.

Check out our latest analysis for Highland Gold Mining

What we can learn from HGM’s beta value

Zooming in on Highland Gold Mining, we see it has a five year beta of 0.84. This is below 1, so historically its share price has been rather independent from the market. This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio’s weighted average beta is higher than 0.84. 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 Highland Gold Mining’s revenue and earnings in the image below.

AIM:HGM Income Statement, September 30th 2019
AIM:HGM Income Statement, September 30th 2019

Does HGM’s size influence the expected beta?

Highland Gold Mining is a small cap stock with a market capitalisation of UK£786m. Most companies this size are actively traded. Small companies can have a low beta value when company specific factors outweigh the influence of overall market volatility. That might be happening here.

What this means for you:

One potential advantage of owning low beta stocks like Highland Gold Mining is that your overall portfolio won’t be too sensitive to overall market movements. However, this can be a blessing or a curse, depending on what’s happening in the broader market. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Highland Gold Mining’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

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