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How Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) Can Impact Your Portfolio Volatility

Simply Wall St

Anyone researching Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) 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 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.

See our latest analysis for Tabula Rasa HealthCare

What does TRHC's beta value mean to investors?

Given that it has a beta of 1.61, we can surmise that the Tabula Rasa HealthCare share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Tabula Rasa HealthCare shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. 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 Tabula Rasa HealthCare's revenue and earnings in the image below.

NasdaqGM:TRHC Income Statement, August 6th 2019

Does TRHC's size influence the expected beta?

Tabula Rasa HealthCare is a small cap stock with a market capitalisation of US$1.2b. 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:

Beta only tells us that the Tabula Rasa HealthCare 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 TRHC is a good investment for you, we also need to consider important company-specific fundamentals such as Tabula Rasa HealthCare’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for TRHC’s future growth? Take a look at our free research report of analyst consensus for TRHC’s outlook.
  2. Past Track Record: Has TRHC 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 TRHC's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how TRHC 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.