If you’re interested in Odfjell Drilling Ltd (OB:ODL), 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 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 mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. 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.
What ODL’s beta value tells investors
Zooming in on Odfjell Drilling, we see it has a five year beta of 0.83. This is below 1, so historically its share price has been rather independent from the market. If history is a good guide, owning the stock should help ensure that your portfolio is not overly sensitive to market volatility. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Odfjell Drilling fares in that regard, below.
Could ODL’s size cause it to be more volatile?
Odfjell Drilling is a small cap stock with a market capitalisation of øre7.4b. 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:
The Odfjell Drilling doesn’t usually show much sensitivity to the broader market. This could be for a variety of reasons. Typically, smaller companies have a low beta if their share price tends to move a lot due to company specific developments. Alternatively, an strong dividend payer might move less than the market because investors are valuing it for its income stream. In order to fully understand whether ODL is a good investment for you, we also need to consider important company-specific fundamentals such as Odfjell Drilling’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 ODL’s future growth? Take a look at our free research report of analyst consensus for ODL’s outlook.
- Past Track Record: Has ODL 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 ODL’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how ODL 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 firstname.lastname@example.org.