Before You Buy Diamond Offshore Drilling, Inc. (NYSE:DO), Consider Its Volatility

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Anyone researching Diamond Offshore Drilling, Inc. (NYSE:DO) 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. 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 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 mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated 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. 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.

See our latest analysis for Diamond Offshore Drilling

What does DO’s beta value mean to investors?

Looking at the last five years, Diamond Offshore Drilling 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 the past is any guide, we would expect that Diamond Offshore Drilling shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it’s also important to consider whether Diamond Offshore Drilling is growing earnings and revenue. You can take a look for yourself, below.

NYSE:DO Income Statement, June 25th 2019
NYSE:DO Income Statement, June 25th 2019

Does DO’s size influence the expected beta?

Diamond Offshore Drilling is a small cap stock with a market capitalisation of US$1.2b. 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 Diamond Offshore Drilling has a reasonably high beta, it’s worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. In order to fully understand whether DO is a good investment for you, we also need to consider important company-specific fundamentals such as Diamond Offshore Drilling’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for DO’s future growth? Take a look at our free research report of analyst consensus for DO’s outlook.
  2. Past Track Record: Has DO 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 DO’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how DO 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.