Should You Be Concerned About Meritor, Inc.'s (NYSE:MTOR) Historical Volatility?
If you're interested in Meritor, Inc. (NYSE:MTOR), 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. 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 are more sensitive to general market forces than others. 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.
Check out our latest analysis for Meritor
What does MTOR's beta value mean to investors?
Looking at the last five years, Meritor has a beta of 1.97. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If this beta value holds true in the future, Meritor shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Meritor fares in that regard, below.
How does MTOR's size impact its beta?
Meritor is a small cap stock with a market capitalisation of US$1.4b. Most companies this size are actively traded. It is quite common to see a small-cap stock with a beta greater than one. In part, that's because relatively few investors can influence the price of a smaller company, compared to a large company.
What this means for you:
Since Meritor has a reasonably high beta, it's worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Meritor’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
Future Outlook: What are well-informed industry analysts predicting for MTOR’s future growth? Take a look at our free research report of analyst consensus for MTOR’s outlook.
Past Track Record: Has MTOR 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 MTOR's historicals for more clarity.
Other Interesting Stocks: It's worth checking to see how MTOR 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.
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