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Applied Industrial Technologies, Inc. (NYSE:AIT): What Does Its Beta Value Mean For Your Portfolio?

Simply Wall St

Anyone researching Applied Industrial Technologies, Inc. (NYSE:AIT) might want to consider the historical volatility of the share price. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated 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 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 Applied Industrial Technologies

What does AIT's beta value mean to investors?

Zooming in on Applied Industrial Technologies, we see it has a five year beta of 1.37. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. If the past is any guide, we would expect that Applied Industrial Technologies 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 Applied Industrial Technologies's revenue and earnings in the image below.

NYSE:AIT Income Statement, December 17th 2019
NYSE:AIT Income Statement, December 17th 2019

How does AIT's size impact its beta?

Applied Industrial Technologies is a fairly large company. It has a market capitalisation of US$2.6b, which means it is probably on the radar of most investors. It takes deep pocketed investors to influence the share price of a large company, so it's a little unusual to see companies this size with high beta values. It may be that that this company is more heavily impacted by broader economic factors than most.

What this means for you:

Beta only tells us that the Applied Industrial Technologies share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. In order to fully understand whether AIT is a good investment for you, we also need to consider important company-specific fundamentals such as Applied Industrial Technologies’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 AIT’s future growth? Take a look at our free research report of analyst consensus for AIT’s outlook.

  2. Past Track Record: Has AIT 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 AIT's historicals for more clarity.

  3. Other Interesting Stocks: It's worth checking to see how AIT measures up against other companies on valuation. You could start with this free list of prospective options.

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.

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. Thank you for reading.