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How Western Areas Limited (ASX:WSA) Can Impact Your Portfolio Volatility

Peter Morris

If you’re interested in Western Areas Limited (ASX:WSA), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. 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 category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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 are more sensitive to general market forces than others. 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. 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 we can learn from WSA’s beta value

Looking at the last five years, Western Areas has a beta of 1.62. 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 Western Areas are likely to rise strongly in times of greed, but sell off in times of fear. 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 Western Areas’s revenue and earnings in the image below.

ASX:WSA Income Statement Export January 22nd 19

Could WSA’s size cause it to be more volatile?

Western Areas is a rather small company. It has a market capitalisation of AU$607m, which means it is probably under the radar of most investors. Relatively few investors can influence the price of a smaller company, compared to a large company. This could explain the high beta value, in this case.

What this means for you:

Since Western Areas tends to moves up when the market is going up, and down when it’s going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether WSA is a good investment for you, we also need to consider important company-specific fundamentals such as Western Areas’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 WSA’s future growth? Take a look at our free research report of analyst consensus for WSA’s outlook.
  2. Past Track Record: Has WSA 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 WSA’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how WSA 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 editorial-team@simplywallst.com.