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What Kind Of Share Price Volatility Should You Expect For Patterson-UTI Energy, Inc. (NASDAQ:PTEN)?

Simply Wall St

If you own shares in Patterson-UTI Energy, Inc. (NASDAQ:PTEN) 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 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. 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.

See our latest analysis for Patterson-UTI Energy

What does PTEN's beta value mean to investors?

Given that it has a beta of 1.59, we can surmise that the Patterson-UTI Energy share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Patterson-UTI Energy shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it's also important to consider whether Patterson-UTI Energy is growing earnings and revenue. You can take a look for yourself, below.

NasdaqGS:PTEN Income Statement, December 2nd 2019

How does PTEN's size impact its beta?

Patterson-UTI Energy is a small cap stock with a market capitalisation of US$1.7b. Most companies this size are actively traded. It has a relatively high beta, which is not unusual among small-cap stocks. Because it takes less capital to move the share price of a smaller company, actively traded small-cap stocks often have a higher beta that a similar large-cap stock.

What this means for you:

Beta only tells us that the Patterson-UTI Energy 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. In order to fully understand whether PTEN is a good investment for you, we also need to consider important company-specific fundamentals such as Patterson-UTI Energy’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 PTEN’s future growth? Take a look at our free research report of analyst consensus for PTEN’s outlook.
  2. Past Track Record: Has PTEN 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 PTEN's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how PTEN 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.