Anyone researching Shiloh Industries, Inc. (NASDAQ:SHLO) might want to consider the historical volatility of the share price. 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 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What we can learn from SHLO’s beta value
Zooming in on Shiloh Industries, we see it has a five year beta of 1.72. 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, Shiloh Industries 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 Shiloh Industries’s revenue and earnings in the image below.
Could SHLO’s size cause it to be more volatile?
Shiloh Industries is a rather small company. It has a market capitalisation of US$93m, which means it is probably under the radar of most investors. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.
What this means for you:
Beta only tells us that the Shiloh Industries share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there’s plenty more to learn. In order to fully understand whether SHLO is a good investment for you, we also need to consider important company-specific fundamentals such as Shiloh Industries’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 SHLO’s future growth? Take a look at our free research report of analyst consensus for SHLO’s outlook.
- Past Track Record: Has SHLO 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 SHLO’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how SHLO measures up against other companies on valuation. You could start with this free list of prospective options.
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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. Thank you for reading.