If you own shares in Sunningdale Tech Ltd (SGX:BHQ) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. 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 mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated 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.
What we can learn from BHQ's beta value
With a beta of 1.04, (which is quite close to 1) the share price of Sunningdale Tech has historically been about as voltile as the broader market. While history does not always repeat, this may indicate that the stock price will continue to be exposed to market risk, albeit not overly so. 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 Sunningdale Tech's revenue and earnings in the image below.
Could BHQ's size cause it to be more volatile?
Sunningdale Tech is a rather small company. It has a market capitalisation of S$248m, which means it is probably under the radar of most investors. Companies this small are usually more volatile than the market, whether or not that volatility is correlated. Therefore, it's a bit surprising to see that this stock has a beta value so close to the overall market.
What this means for you:
Since Sunningdale Tech has a beta close to one, it will probably show a positive return when the market is moving up, based on history. If you're trying to generate better returns than the market, it would be worth thinking about other metrics such as cashflows, dividends and revenue growth might be a more useful guide to the future. In order to fully understand whether BHQ is a good investment for you, we also need to consider important company-specific fundamentals such as Sunningdale Tech’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 BHQ’s future growth? Take a look at our free research report of analyst consensus for BHQ’s outlook.
- Past Track Record: Has BHQ 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 BHQ's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how BHQ 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 email@example.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.
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