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Before You Buy President Energy Plc (LON:PPC), Consider Its Volatility

Simply Wall St

If you own shares in President Energy Plc (LON:PPC) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all 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 below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.

See our latest analysis for President Energy

What we can learn from PPC's beta value

Looking at the last five years, President Energy has a beta of 1.64. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that President Energy shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it's also important to consider whether President Energy is growing earnings and revenue. You can take a look for yourself, below.

AIM:PPC Income Statement, August 9th 2019

Could PPC's size cause it to be more volatile?

President Energy is a noticeably small company, with a market capitalisation of UK£75m. Most companies this size are not always actively traded. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.

What this means for you:

Beta only tells us that the President Energy 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 PPC is a good investment for you, we also need to consider important company-specific fundamentals such as President Energy’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for PPC’s future growth? Take a look at our free research report of analyst consensus for PPC’s outlook.
  2. Past Track Record: Has PPC 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 PPC's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how PPC 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.