An investor's guide to PotashCorp's 1Q14 and forward outlook (Part 9 of 11)
Beta: Measuring the volatility
Speaking of risk, there is one measurement of volatility that investors might want to take a look at when deciding whether to investing in a company: beta, which measures the volatility, or systematic risk, of a company in relation to the overall market.
Movements with the broad market
A company with a beta lower than one means that the security’s (stock) movement is less volatile compared to the broad market, while a beta higher than one means the security’s (stock) movement is more volatile than the market. Generally, when the broad market sells of, companies with lower beta will fall less. On the other hand, companies with higher beta will fall by a larger percentage. It’s important to know that beta does not capture volatility in returns that are affected by idiosyncratic events.
PotashCorp has a lower beta
As the chart above shows, PotashCorp (POT) has lower beta than the Market Vectors Agribusiness ETF (MOO), and other fertilizer stocks such as Agrium Inc. (AGU), Mosaic Company (MOS), and Intrepid Potash, Inc. (IPI). There are a few factors that can explain PotashCorp’s lower beta.
- First, PotashCorp is a larger company than the other two fertilizer stocks. Larger companies tend to be more stable and mature, so their performances tend to be less sensitive to the broad market.
- Second, as discussed earlier, PotashCorp’s nitrogen fertilizer business provides more stability.
- Third, a large percentage of PotashCorp’s earnings is derived from potash business, which is a higher-margin product. Such high margins provide a larger cushion when revenue does fall.
- Fourth, PotashCorp has one of the lowest cost mines in the world, which generally makes it a safer investment.
Browse this series on Market Realist:
- Part 1 - An investor’s guide to PotashCorp’s 1Q14 and forward outlook
- Part 2 - PotashCorp’s 2Q earnings to benefit from higher fertilizer prices
- Part 3 - Logistics and production issues hit PotashCorp’s shipments
- Basic Materials Industry