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Does Market Volatility Impact Babcock International Group PLC's (LON:BAB) Share Price?

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Anyone researching Babcock International Group PLC (LON:BAB) 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 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 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. 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 Babcock International Group

What we can learn from BAB's beta value

Given that it has a beta of 0.81, we can surmise that the Babcock International Group share price has not been strongly impacted by broader market volatility (over the last 5 years). This means that -- if history is a guide -- buying the stock would reduce the impact of overall market volatility in many portfolios (depending on the beta of the portfolio, of course). 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 Babcock International Group's revenue and earnings in the image below.

LSE:BAB Income Statement, June 19th 2019
LSE:BAB Income Statement, June 19th 2019

How does BAB's size impact its beta?

Babcock International Group is a reasonably big company, with a market capitalisation of UK£2.4b. Most companies this size are actively traded with decent volumes of shares changing hands each day. When large companies like this one have a low beta value, there is usually some other factor that is having an outsized impact on the share price. For example, a business with significant fixed regulated assets might earn a reasonably predictable return, regardless of broader macroeconomic factors. Alternatively, lumpy earnings might mean minimal share price correlation with the broader market.

What this means for you:

One potential advantage of owning low beta stocks like Babcock International Group is that your overall portfolio won't be too sensitive to overall market movements. However, this can be a blessing or a curse, depending on what's happening in the broader market. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Babcock International Group’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 BAB’s future growth? Take a look at our free research report of analyst consensus for BAB’s outlook.

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

  3. Other Interesting Stocks: It's worth checking to see how BAB measures up against other companies on valuation. You could start with this free list of prospective options.

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.

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. Thank you for reading.

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