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Does Commercial Metals Company (NYSE:CMC) Have A High Beta?

Simply Wall St
·3 mins read

Anyone researching Commercial Metals Company (NYSE:CMC) might want to consider the historical volatility of the share price. 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 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 mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.

See our latest analysis for Commercial Metals

What we can learn from CMC's beta value

Given that it has a beta of 1.60, we can surmise that the Commercial Metals share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Commercial Metals 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 Commercial Metals's revenue and earnings in the image below.

NYSE:CMC Income Statement April 17th 2020
NYSE:CMC Income Statement April 17th 2020

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

With a market capitalisation of US$1.8b, Commercial Metals is a small cap stock. However, it is big enough to catch the attention of professional investors. It's not particularly surprising that it has a higher beta than the overall market. That's because it takes less money to influence the share price of a smaller company, than a bigger company.

What this means for you:

Since Commercial Metals tends to move 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. In order to fully understand whether CMC is a good investment for you, we also need to consider important company-specific fundamentals such as Commercial Metals’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 CMC’s future growth? Take a look at our free research report of analyst consensus for CMC’s outlook.

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

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