U.S. Markets closed

What You Must Know About Ellington Residential Mortgage REIT's (NYSE:EARN) Beta Value

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

If you own shares in Ellington Residential Mortgage REIT (NYSE:EARN) 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated 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 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.

Check out our latest analysis for Ellington Residential Mortgage REIT

What does EARN's beta value mean to investors?

Zooming in on Ellington Residential Mortgage REIT, we see it has a five year beta of 0.83. This is below 1, so historically its share price has been rather independent from the market. If history is a good guide, owning the stock should help ensure that your portfolio is not overly sensitive to market volatility. 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 Ellington Residential Mortgage REIT's revenue and earnings in the image below.

NYSE:EARN Income Statement, July 11th 2019

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

Ellington Residential Mortgage REIT is a noticeably small company, with a market capitalisation of US$136m. Most companies this size are not always actively traded. Very small companies often have a low beta value because their share prices are not well correlated with market volatility. This could be because the price is reacting to company specific events. Alternatively, the shares may not be actively traded.

What this means for you:

The Ellington Residential Mortgage REIT 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. In order to fully understand whether EARN is a good investment for you, we also need to consider important company-specific fundamentals such as Ellington Residential Mortgage REIT’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 EARN’s future growth? Take a look at our free research report of analyst consensus for EARN’s outlook.
  2. Past Track Record: Has EARN 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 EARN's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how EARN 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.