Anyone researching Aehr Test Systems (NASDAQ:AEHR) 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 type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the 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 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.
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What AEHR’s beta value tells investors
Looking at the last five years, Aehr Test Systems has a beta of 0.88. The fact that this is well below 1 indicates that its share price movements haven’t historically been very sensitive to overall market volatility. This means that — if history is a guide — buying the stock would reduce the impact of overall market volatility in many portfolios (depending on the beta of the portfolio, of course). Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Aehr Test Systems fares in that regard, below.
How does AEHR’s size impact its beta?
Aehr Test Systems is a rather small company. It has a market capitalisation of US$25m, which means it is probably under the radar of most investors. 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:
One potential advantage of owning low beta stocks like Aehr Test Systems is that your overall portfolio won’t be too sensitive to overall market movements. However, this can be a blessing or a curse, depending on what’s happening in the broader market. In order to fully understand whether AEHR is a good investment for you, we also need to consider important company-specific fundamentals such as Aehr Test Systems’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 AEHR’s future growth? Take a look at our free research report of analyst consensus for AEHR’s outlook.
- Past Track Record: Has AEHR 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 AEHR’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how AEHR measures up against other companies on valuation. You could start with this free list of prospective options.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.