How Does Williams-Sonoma, Inc. (NYSE:WSM) Affect Your Portfolio Volatility?

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If you own shares in Williams-Sonoma, Inc. (NYSE:WSM) 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 category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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 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.

See our latest analysis for Williams-Sonoma

What we can learn from WSM’s beta value

As it happens, Williams-Sonoma has a five year beta of 0.92. This is fairly close to 1, so the stock has historically shown a somewhat similar level of volatility as the market. Using history as a guide, we might surmise that the share price is likely to be influenced by market voltility going forward but it probably won’t be particularly sensitive to it. Beta is worth considering, but it’s also important to consider whether Williams-Sonoma is growing earnings and revenue. You can take a look for yourself, below.

NYSE:WSM Income Statement, April 30th 2019
NYSE:WSM Income Statement, April 30th 2019

Could WSM’s size cause it to be more volatile?

With a market capitalisation of US$4.5b, Williams-Sonoma is a pretty big company, even by global standards. It is quite likely well known to very many investors. It’s not overly surprising to see large companies with beta values reasonably close to the market average. After all, large companies make up a higher weighting of the index than do small companies.

What this means for you:

It is probable that there is a link between the share price of Williams-Sonoma and the broader market, since it has a beta value quite close to one. However, long term investors are generally well served by looking past market volatility and focussing on the underlying development of the business. If that’s your game, metrics such as revenue, earnings and cash flow will be more useful. In order to fully understand whether WSM is a good investment for you, we also need to consider important company-specific fundamentals such as Williams-Sonoma’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 WSM’s future growth? Take a look at our free research report of analyst consensus for WSM’s outlook.
  2. Past Track Record: Has WSM 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 WSM’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how WSM 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.