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How Does Mercantile Bank Corporation (NASDAQ:MBWM) Affect Your Portfolio Volatility?

Ajay Mannan

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If you’re interested in Mercantile Bank Corporation (NASDAQ:MBWM), 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 category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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 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. 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.

Check out our latest analysis for Mercantile Bank

What does MBWM’s beta value mean to investors?

Given that it has a beta of 0.85, we can surmise that the Mercantile Bank 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). Beta is worth considering, but it’s also important to consider whether Mercantile Bank is growing earnings and revenue. You can take a look for yourself, below.

NASDAQGS:MBWM Income Statement Export February 5th 19
NASDAQGS:MBWM Income Statement Export February 5th 19

Does MBWM’s size influence the expected beta?

Mercantile Bank is a small company, but not tiny and little known. It has a market capitalisation of US$560m, which means it would be on the radar of intstitutional investors. Small companies often have a high beta value, but they can be heavily influenced by company-specific events. This might explain why this stock has a low beta.

What this means for you:

Since Mercantile Bank is not heavily influenced by market moves, its share price is probably far more dependend on company specific developments. It could pay to take a closer look at metrics such as revenue growth, earnings growth, and debt. In order to fully understand whether MBWM is a good investment for you, we also need to consider important company-specific fundamentals such as Mercantile Bank’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for MBWM’s future growth? Take a look at our free research report of analyst consensus for MBWM’s outlook.

  2. Past Track Record: Has MBWM 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 MBWM’s historicals for more clarity.

  3. Other Interesting Stocks: It’s worth checking to see how MBWM 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 editorial-team@simplywallst.com.