If you own shares in Deluxe Corporation (NYSE:DLX) 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 type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. 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 are more sensitive to general market forces than others. 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What does DLX's beta value mean to investors?
Looking at the last five years, Deluxe has a beta of 1.4. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If this beta value holds true in the future, Deluxe shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Deluxe's revenue and earnings in the image below.
Could DLX's size cause it to be more volatile?
Deluxe is a small cap stock with a market capitalisation of US$1.8b. 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:
Since Deluxe 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 DLX is a good investment for you, we also need to consider important company-specific fundamentals such as Deluxe’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for DLX’s future growth? Take a look at our free research report of analyst consensus for DLX’s outlook.
- Past Track Record: Has DLX 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 DLX's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how DLX measures up against other companies on valuation. You could start with this free list of prospective options.
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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.