How Does Liquidity Services, Inc. (NASDAQ:LQDT) Affect Your Portfolio Volatility?

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Anyone researching Liquidity Services, Inc. (NASDAQ:LQDT) 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. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. 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. 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.

View our latest analysis for Liquidity Services

What LQDT’s beta value tells investors

Given that it has a beta of 1.24, we can surmise that the Liquidity Services share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Liquidity Services 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 Liquidity Services’s revenue and earnings in the image below.

NASDAQGS:LQDT Income Statement Export February 7th 19
NASDAQGS:LQDT Income Statement Export February 7th 19

Does LQDT’s size influence the expected beta?

Liquidity Services is a rather small company. It has a market capitalisation of US$265m, which means it is probably under the radar of most investors. Relatively few investors can influence the price of a smaller company, compared to a large company. This could explain the high beta value, in this case.

What this means for you:

Since Liquidity Services 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 LQDT is a good investment for you, we also need to consider important company-specific fundamentals such as Liquidity Services’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

  1. Financial Health: Are LQDT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has LQDT 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 LQDT’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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 editorial-team@simplywallst.com.