Anyone researching Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564) might want to consider the historical volatility of the share price. 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 second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the 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. 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.
What does 564’s beta value mean to investors?
Looking at the last five years, Zhengzhou Coal Mining Machinery Group has a beta of 0.82. The fact that this is well below 1 indicates that its share price movements haven’t historically been very sensitive to overall market volatility. 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 0.82. Beta is worth considering, but it’s also important to consider whether Zhengzhou Coal Mining Machinery Group is growing earnings and revenue. You can take a look for yourself, below.
Could 564’s size cause it to be more volatile?
Zhengzhou Coal Mining Machinery Group is a small cap stock with a market capitalisation of HK$10b. Most companies this size are actively traded. Small companies often have a high beta value, but they can be heavily influenced by company-specific events. This might explain why this stock has a low beta.
What this means for you:
Since Zhengzhou Coal Mining Machinery Group 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. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Zhengzhou Coal Mining Machinery Group’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Future Outlook: What are well-informed industry analysts predicting for 564’s future growth? Take a look at our free research report of analyst consensus for 564’s outlook.
- Past Track Record: Has 564 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 564’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how 564 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 email@example.com.