What You Must Know About Peyto Exploration & Development Corp.’s (TSE:PEY) Beta Value

If you own shares in Peyto Exploration & Development Corp. (TSE:PEY) then it’s worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. 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 second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the 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.

See our latest analysis for Peyto Exploration & Development

What we can learn from PEY’s beta value

Given that it has a beta of 1.14, we can surmise that the Peyto Exploration & Development share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Peyto Exploration & Development shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Beta is worth considering, but it’s also important to consider whether Peyto Exploration & Development is growing earnings and revenue. You can take a look for yourself, below.

TSX:PEY Income Statement, April 7th 2019
TSX:PEY Income Statement, April 7th 2019

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

Peyto Exploration & Development is a small company, but not tiny and little known. It has a market capitalisation of CA$1.1b, which means it would be on the radar of intstitutional investors. It is quite common to see a small-cap stock with a beta greater than one. In part, that’s because relatively few investors can influence the price of a smaller company, compared to a large company.

What this means for you:

Beta only tells us that the Peyto Exploration & Development 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 PEY is a good investment for you, we also need to consider important company-specific fundamentals such as Peyto Exploration & Development’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 PEY’s future growth? Take a look at our free research report of analyst consensus for PEY’s outlook.
  2. Past Track Record: Has PEY 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 PEY’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how PEY 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.