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How Does Investing In Semcon AB (publ) (STO:SEMC) Impact The Volatility Of Your Portfolio?

If you own shares in Semcon AB (publ) (STO:SEMC) 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 other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated 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. 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 Semcon

What we can learn from SEMC's beta value

Given that it has a beta of 0.84, we can surmise that the Semcon share price has not been strongly impacted by broader market volatility (over the last 5 years). This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio's weighted average beta is higher than 0.84. 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 Semcon fares in that regard, below.

OM:SEMC Income Statement, November 22nd 2019
OM:SEMC Income Statement, November 22nd 2019

How does SEMC's size impact its beta?

With a market capitalisation of kr1.1b, Semcon is a very small company by global standards. It is quite likely to be unknown to most investors. Companies with market capitalisations around this size often show poor correlation with the broader market because market volatility is overshadowed by company specific events, or other factors. It's worth checking to see how often shares are traded, because very small companies with very low beta values are often only thinly traded.

What this means for you:

The Semcon doesn't usually show much sensitivity to the broader market. This could be for a variety of reasons. Typically, smaller companies have a low beta if their share price tends to move a lot due to company specific developments. Alternatively, an strong dividend payer might move less than the market because investors are valuing it for its income stream. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Semcon’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 SEMC’s future growth? Take a look at our free research report of analyst consensus for SEMC’s outlook.

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

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

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