If you own shares in Arotech Corporation (NASDAQ:ARTX) 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 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. Beta is a widely used metric to measure a stock’s exposure to market risk (volatility). Before we go on, it’s worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that ‘volatility is far from synonymous with risk.’ Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is 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.
What ARTX’s beta value tells investors
Looking at the last five years, Arotech has a beta of 1.65. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If this beta value holds true in the future, Arotech 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 Arotech’s revenue and earnings in the image below.
How does ARTX’s size impact its beta?
Arotech is a noticeably small company, with a market capitalisation of US$69m. Most companies this size are not always actively traded. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.
What this means for you:
Beta only tells us that the Arotech 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. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Arotech’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 ARTX’s future growth? Take a look at our free research report of analyst consensus for ARTX’s outlook.
- Past Track Record: Has ARTX 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 ARTX’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how ARTX 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.