Anyone researching ECN Capital Corp. (TSE:ECN) 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. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the 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. 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.
What does ECN's beta value mean to investors?
Using history as a guide, we might surmise that the share price is likely to be influenced by market volatility going forward but it probably won't be particularly sensitive to it. Beta is worth considering, but it's also important to consider whether ECN Capital is growing earnings and revenue. You can take a look for yourself, below.
Could ECN's size cause it to be more volatile?
With a market capitalisation of CA$776m, ECN Capital is a small cap stock. However, it is big enough to catch the attention of professional investors.
What this means for you:
Since ECN Capital has a beta close to one, it will probably show a positive return when the market is moving up, based on history. If you're trying to generate better returns than the market, it would be worth thinking about other metrics such as cashflows, dividends and revenue growth might be a more useful guide to the future. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as ECN Capital’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 ECN’s future growth? Take a look at our free research report of analyst consensus for ECN’s outlook.
- Past Track Record: Has ECN 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 ECN's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how ECN measures up against other companies on valuation. You could start with this free list of prospective options.
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