If you own shares in Methode Electronics, Inc. (NYSE:MEI) 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. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a 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 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 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 we can learn from MEI's beta value
Zooming in on Methode Electronics, we see it has a five year beta of 1.46. 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 Methode Electronics are likely to rise strongly in times of greed, but sell off in times of fear. 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 Methode Electronics fares in that regard, below.
How does MEI's size impact its beta?
With a market capitalisation of US$950m, Methode Electronics is a small cap stock. However, it is big enough to catch the attention of professional investors. It is quite common to see a small-cap stock with a beta greater than one. In part, that's because relatively few investors can influence the price of a smaller company, compared to a large company.
What this means for you:
Beta only tells us that the Methode Electronics 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 Methode Electronics’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 MEI’s future growth? Take a look at our free research report of analyst consensus for MEI’s outlook.
- Past Track Record: Has MEI 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 MEI's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how MEI 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 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. Thank you for reading.