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Anyone researching The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) might want to consider the historical volatility of the share price. 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 category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What does NTB's beta value mean to investors?
Given that it has a beta of 1.10, we can surmise that the Bank of N.T. Butterfield & Son share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that Bank of N.T. Butterfield & Son are likely to rise strongly in times of greed, but sell off in times of fear. 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 Bank of N.T. Butterfield & Son's revenue and earnings in the image below.
Does NTB's size influence the expected beta?
Bank of N.T. Butterfield & Son is a small company, but not tiny and little known. It has a market capitalisation of US$1.8b, which means it would be on the radar of intstitutional 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:
Since Bank of N.T. Butterfield & Son 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 NTB is a good investment for you, we also need to consider important company-specific fundamentals such as Bank of N.T. Butterfield & Son’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
Future Outlook: What are well-informed industry analysts predicting for NTB’s future growth? Take a look at our free research report of analyst consensus for NTB’s outlook.
Past Track Record: Has NTB 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 NTB's historicals for more clarity.
Other Interesting Stocks: It's worth checking to see how NTB 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.