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How Does Silicom Ltd. (NASDAQ:SILC) Affect Your Portfolio Volatility?

Simply Wall St

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If you're interested in Silicom Ltd. (NASDAQ:SILC), 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. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.

View our latest analysis for Silicom

What SILC's beta value tells investors

Given that it has a beta of 0.86, we can surmise that the Silicom 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 Silicom's revenue and earnings in the image below.

NasdaqGS:SILC Income Statement, July 8th 2019

Could SILC's size cause it to be more volatile?

Silicom is a rather small company. It has a market capitalisation of US$244m, which means it is probably under the radar of most investors. Companies with market capitalisations around this size often show poor correlation with the broader market because market volatility is overshadowed by company specific events, or other factors. It's worth checking to see how often shares are traded, because very small companies with very low beta values are often only thinly traded.

What this means for you:

One potential advantage of owning low beta stocks like Silicom 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. In order to fully understand whether SILC is a good investment for you, we also need to consider important company-specific fundamentals such as Silicom’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 SILC’s future growth? Take a look at our free research report of analyst consensus for SILC’s outlook.
  2. Past Track Record: Has SILC 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 SILC's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how SILC 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.