If you're interested in MagnaChip Semiconductor Corporation (NYSE:MX), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. 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. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.
What MX's beta value tells investors
Zooming in on MagnaChip Semiconductor, we see it has a five year beta of 1.48. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. Based on this history, investors should be aware that MagnaChip Semiconductor are likely to rise strongly in times of greed, but sell off in times of fear. Beta is worth considering, but it's also important to consider whether MagnaChip Semiconductor is growing earnings and revenue. You can take a look for yourself, below.
Could MX's size cause it to be more volatile?
MagnaChip Semiconductor is a noticeably small company, with a market capitalisation of US$326m. Most companies this size are not always actively traded. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.
What this means for you:
Beta only tells us that the MagnaChip Semiconductor 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 MagnaChip Semiconductor’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 MX’s future growth? Take a look at our free research report of analyst consensus for MX’s outlook.
- Past Track Record: Has MX 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 MX's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how MX 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 firstname.lastname@example.org. 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.
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