How Does Valeura Energy Inc (TSE:VLE) Affect Your Portfolio Volatility?

If you’re interested in Valeura Energy Inc (TSE:VLE), 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 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. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know 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 Valeura Energy

What we can learn from VLE’s beta value

Given that it has a beta of 0.87, we can surmise that the Valeura Energy share price has not been strongly impacted by broader market volatility (over the last 5 years). This means that — if history is a guide — buying the stock would reduce the impact of overall market volatility in many portfolios (depending on the beta of the portfolio, of course). 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 Valeura Energy’s revenue and earnings in the image below.

TSX:VLE Income Statement Export November 9th 18
TSX:VLE Income Statement Export November 9th 18

Does VLE’s size influence the expected beta?

Valeura Energy is a rather small company. It has a market capitalisation of CA$371m, which means it is probably under the radar of most investors. Companies with market capitalisations around this size often show poor correlation with the broader market because market volatility is overshadowed by company specific events, or other factors. It’s worth checking to see how often shares are traded, because very small companies with very low beta values are often only thinly traded.

What this means for you:

Since Valeura Energy is not heavily influenced by market moves, its share price is probably far more dependend on company specific developments. It could pay to take a closer look at metrics such as revenue growth, earnings growth, and debt. In order to fully understand whether VLE is a good investment for you, we also need to consider important company-specific fundamentals such as Valeura Energy’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 VLE’s future growth? Take a look at our free research report of analyst consensus for VLE’s outlook.
  2. Past Track Record: Has VLE 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 VLE’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how VLE measures up against other companies on valuation. You could start with this free list of prospective options.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.