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Does The Selective Insurance Group, Inc. (NASDAQ:SIGI) Share Price Fall With The Market?

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If you own shares in Selective Insurance Group, Inc. (NASDAQ:SIGI) 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 is a widely used metric to measure a stock's exposure to market risk (volatility). Before we go on, it's worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that 'volatility is far from synonymous with risk.' Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is 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.

View our latest analysis for Selective Insurance Group

What does SIGI's beta value mean to investors?

Zooming in on Selective Insurance Group, we see it has a five year beta of 0.84. This is below 1, so historically its share price has been rather independent from the market. 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. 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 Selective Insurance Group's revenue and earnings in the image below.

NasdaqGS:SIGI Income Statement April 16th 2020
NasdaqGS:SIGI Income Statement April 16th 2020

Does SIGI's size influence the expected beta?

With a market capitalisation of US$3.0b, Selective Insurance Group is a pretty big company, even by global standards. It is quite likely well known to very many investors. When a large company like this trades with a low beta value, it is often because there is some other systemic factor influencing the share price. For example, commodity prices might influence a mining company strongly, while expectations around dividend payments (and capital expenditure requirements) might have a big impact on utilities.

What this means for you:

The Selective Insurance Group 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 Selective Insurance Group’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 SIGI’s future growth? Take a look at our free research report of analyst consensus for SIGI’s outlook.

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

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