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If you’re interested in Bannerman Resources Limited (ASX:BMN), 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. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
Check out our latest analysis for Bannerman Resources
What does BMN’s beta value mean to investors?
Looking at the last five years, Bannerman Resources has a beta of 1.54. 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 Bannerman Resources are likely to rise strongly in times of greed, but sell off in times of fear. Beta is worth considering, but it’s also important to consider whether Bannerman Resources is growing earnings and revenue. You can take a look for yourself, below.
Could BMN’s size cause it to be more volatile?
Bannerman Resources is a noticeably small company, with a market capitalisation of AU$56.7m. Most companies this size are not always actively traded. 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:
Beta only tells us that the Bannerman Resources 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 BMN is a good investment for you, we also need to consider important company-specific fundamentals such as Bannerman Resources’s financial health and performance track record. I highly recommend you dive deeper by considering the following: