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What Kind Of Share Price Volatility Should You Expect For Cabot Microelectronics Corporation (NASDAQ:CCMP)?

Simply Wall St

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If you're interested in Cabot Microelectronics Corporation (NASDAQ:CCMP), 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 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 mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. 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 Cabot Microelectronics

What CCMP's beta value tells investors

Given that it has a beta of 1.4, we can surmise that the Cabot Microelectronics share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Cabot Microelectronics shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. 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 Cabot Microelectronics's revenue and earnings in the image below.

NasdaqGS:CCMP Income Statement, June 27th 2019

Does CCMP's size influence the expected beta?

Cabot Microelectronics is a reasonably big company, with a market capitalisation of US$3.2b. Most companies this size are actively traded with decent volumes of shares changing hands each day. It has a relatively high beta, suggesting it may be somehow leveraged to macroeconomic conditions. For example, it might be a high growth stock with lots of investors trading the shares. It's notable when large companies to have high beta values, because it usually takes substantial capital flows to move their share prices.

What this means for you:

Since Cabot Microelectronics has a reasonably high beta, it's worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. In order to fully understand whether CCMP is a good investment for you, we also need to consider important company-specific fundamentals such as Cabot Microelectronics’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 CCMP’s future growth? Take a look at our free research report of analyst consensus for CCMP’s outlook.
  2. Past Track Record: Has CCMP 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 CCMP's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how CCMP 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.