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If you own shares in China Everbright Water Limited (SGX:U9E) then it’s worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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 are more sensitive to general market forces than others. 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 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 we can learn from U9E’s beta value
Given that it has a beta of 1.46, we can surmise that the China Everbright Water share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, China Everbright Water 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 China Everbright Water’s revenue and earnings in the image below.
Does U9E’s size influence the expected beta?
China Everbright Water is a small cap stock with a market capitalisation of S$1.0b. Most companies this size are actively traded. It’s not particularly surprising that it has a higher beta than the overall market. That’s because it takes less money to influence the share price of a smaller company, than a bigger company.
What this means for you:
Since China Everbright Water tends to moves up when the market is going up, and down when it’s going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether U9E is a good investment for you, we also need to consider important company-specific fundamentals such as China Everbright Water’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 U9E’s future growth? Take a look at our free research report of analyst consensus for U9E’s outlook.
- Past Track Record: Has U9E 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 U9E’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how U9E 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 firstname.lastname@example.org. 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.