Anyone researching Trex Company, Inc. (NYSE:TREX) might want to consider the historical volatility of the share price. 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. 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 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.
What we can learn from TREX's beta value
Looking at the last five years, Trex Company has a beta of 1.96. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. Based on this history, investors should be aware that Trex Company are likely to rise strongly in times of greed, but sell off in times of fear. 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 Trex Company fares in that regard, below.
Does TREX's size influence the expected beta?
Trex Company is a reasonably big company, with a market capitalisation of US$4.5b. Most companies this size are actively traded with decent volumes of shares changing hands each day. It takes a lot of money to influence the share price of large companies like this one. That makes it interesting to note that its share price has a history of sensitivity to market volatility. There might be some aspect of the business that means profits are leveraged to the economic cycle.
What this means for you:
Beta only tells us that the Trex Company share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. In order to fully understand whether TREX is a good investment for you, we also need to consider important company-specific fundamentals such as Trex Company’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 TREX’s future growth? Take a look at our free research report of analyst consensus for TREX’s outlook.
- Past Track Record: Has TREX 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 TREX's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how TREX 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.