If you own shares in First Merchants Corporation (NASDAQ:FRME) 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 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. 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.
What we can learn from FRME’s beta value
First Merchants has a five-year beta of 0.99. This is reasonably close to the market beta of 1, so the stock has in the past displayed similar levels of volatility to the overall market. While history does not always repeat, this may indicate that the stock price will continue to be exposed to market risk, albeit not overly so. 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 First Merchants’s revenue and earnings in the image below.
How does FRME’s size impact its beta?
First Merchants is a small cap stock with a market capitalisation of US$1.9b. Most companies this size are actively traded. Small companies often have a high beta value because the stock price can move on relatively low capital flows. So it’s interesting to note that this stock historically has a beta value quite close to one.
What this means for you:
Since First Merchants 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. In order to fully understand whether FRME is a good investment for you, we also need to consider important company-specific fundamentals such as First Merchants’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for FRME’s future growth? Take a look at our free research report of analyst consensus for FRME’s outlook.
- Past Track Record: Has FRME 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 FRME’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how FRME measures up against other companies on valuation. You could start with this free list of prospective options.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.