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Before You Buy Tower Semiconductor Ltd. (NASDAQ:TSEM), Consider Its Volatility

Simply Wall St

If you're interested in Tower Semiconductor Ltd. (NASDAQ:TSEM), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. 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 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 are more sensitive to general market forces than others. 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. 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.

Check out our latest analysis for Tower Semiconductor

What does TSEM's beta value mean to investors?

Given that it has a beta of 1.19, we can surmise that the Tower Semiconductor share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Tower Semiconductor shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Beta is worth considering, but it's also important to consider whether Tower Semiconductor is growing earnings and revenue. You can take a look for yourself, below.

NasdaqGS:TSEM Income Statement, January 17th 2020
NasdaqGS:TSEM Income Statement, January 17th 2020

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

With a market capitalisation of US$2.7b, Tower Semiconductor is a pretty big company, even by global standards. It is quite likely well known to very many 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:

Since Tower Semiconductor 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. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Tower Semiconductor’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 TSEM’s future growth? Take a look at our free research report of analyst consensus for TSEM’s outlook.

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

  3. Other Interesting Stocks: It's worth checking to see how TSEM 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.