How Does Investing In R.R. Donnelley & Sons Company (NYSE:RRD) Impact The Volatility Of Your Portfolio?

If you own shares in R.R. Donnelley & Sons Company (NYSE:RRD) 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. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a 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. 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.

Check out our latest analysis for R.R. Donnelley & Sons

What does RRD’s beta value mean to investors?

Given that it has a beta of 1.87, we can surmise that the R.R. Donnelley & Sons share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that R.R. Donnelley & Sons shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. 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 R.R. Donnelley & Sons’s revenue and earnings in the image below.

NYSE:RRD Income Statement, July 22nd 2019
NYSE:RRD Income Statement, July 22nd 2019

Does RRD’s size influence the expected beta?

R.R. Donnelley & Sons is a noticeably small company, with a market capitalisation of US$142m. Most companies this size are not always actively traded. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.

What this means for you:

Beta only tells us that the R.R. Donnelley & Sons 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. In order to fully understand whether RRD is a good investment for you, we also need to consider important company-specific fundamentals such as R.R. Donnelley & Sons’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 RRD’s future growth? Take a look at our free research report of analyst consensus for RRD’s outlook.
  2. Past Track Record: Has RRD 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 RRD’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how RRD 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 editorial-team@simplywallst.com. 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.