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How Does Investing In Genesis Healthcare, Inc. (NYSE:GEN) Impact The Volatility Of Your Portfolio?

Simply Wall St

Anyone researching Genesis Healthcare, Inc. (NYSE:GEN) 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 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 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. 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.

View our latest analysis for Genesis Healthcare

What GEN's beta value tells investors

Zooming in on Genesis Healthcare, we see it has a five year beta of 1.22. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. If this beta value holds true in the future, Genesis Healthcare shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Genesis Healthcare's revenue and earnings in the image below.

NYSE:GEN Income Statement, January 11th 2020

How does GEN's size impact its beta?

Genesis Healthcare is a noticeably small company, with a market capitalisation of US$264m. Most companies this size are not always actively traded. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.

What this means for you:

Beta only tells us that the Genesis Healthcare share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Genesis Healthcare’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 GEN’s future growth? Take a look at our free research report of analyst consensus for GEN’s outlook.
  2. Past Track Record: Has GEN 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 GEN's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how GEN 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.