If you’re interested in Lexington Realty Trust (NYSE:LXP), 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 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. 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.
What LXP’s beta value tells investors
Looking at the last five years, Lexington Realty Trust has a beta of 0.81. The fact that this is well below 1 indicates that its share price movements haven’t historically been very sensitive to overall market volatility. This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio’s weighted average beta is higher than 0.81. 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 Lexington Realty Trust’s revenue and earnings in the image below.
How does LXP’s size impact its beta?
Lexington Realty Trust is a fairly large company. It has a market capitalisation of US$2.4b, which means it is probably on the radar of most investors. When large companies like this one have a low beta value, there is usually some other factor that is having an outsized impact on the share price. For example, a business with significant fixed regulated assets might earn a reasonably predictable return, regardless of broader macroeconomic factors. Alternatively, lumpy earnings might mean minimal share price correlation with the broader market.
What this means for you:
One potential advantage of owning low beta stocks like Lexington Realty Trust is that your overall portfolio won’t be too sensitive to overall market movements. However, this can be a blessing or a curse, depending on what’s happening in the broader market. In order to fully understand whether LXP is a good investment for you, we also need to consider important company-specific fundamentals such as Lexington Realty Trust’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 LXP’s future growth? Take a look at our free research report of analyst consensus for LXP’s outlook.
- Past Track Record: Has LXP 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 LXP’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how LXP measures up against other companies on valuation. You could start with this free list of prospective options.
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