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Anyone researching Powerlong Real Estate Holdings Limited (HKG:1238) 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 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 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.
See our latest analysis for Powerlong Real Estate Holdings
What does 1238’s beta value mean to investors?
Given that it has a beta of 1.18, we can surmise that the Powerlong Real Estate Holdings share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Powerlong Real Estate Holdings shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Powerlong Real Estate Holdings fares in that regard, below.
Does 1238’s size influence the expected beta?
Powerlong Real Estate Holdings is a small company, but not tiny and little known. It has a market capitalisation of HK$12.6b, which means it would be on the radar of intstitutional investors. It’s not particularly surprising that it has a higher beta than the overall market. That’s because it takes less money to influence the share price of a smaller company, than a bigger company.
What this means for you:
Since Powerlong Real Estate Holdings has a reasonably high beta, it’s 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 1238 is a good investment for you, we also need to consider important company-specific fundamentals such as Powerlong Real Estate Holdings’s financial health and performance track record. I highly recommend you dive deeper by considering the following: