If you own shares in ReneSola Ltd (NYSE:SOL) then itâs 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 category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.
Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said âvolatility is far from synonymous with riskâ 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. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
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Looking at the last five years, ReneSola has a beta of 1.63. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that ReneSola 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 ReneSolaâs revenue and earnings in the image below.
With a market capitalisation of US$67m, ReneSola is a very small company by global standards. It is quite likely to be unknown to most investors. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.
Since ReneSola has a reasonably high beta, itâs 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 SOL is a good investment for you, we also need to consider important company-specific fundamentals such as ReneSolaâs financial health and performance track record. I highly recommend you dive deeper by considering the following:
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
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