If you’re interested in Recipe Unlimited Corporation (TSE:RECP), 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 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. 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.
View our latest analysis for Recipe Unlimited
What we can learn from RECP’s beta value
Given that it has a beta of 1.24, we can surmise that the Recipe Unlimited share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Recipe Unlimited shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Beta is worth considering, but it’s also important to consider whether Recipe Unlimited is growing earnings and revenue. You can take a look for yourself, below.
Could RECP’s size cause it to be more volatile?
With a market capitalisation of CA$1.6b, Recipe Unlimited is a small cap stock. However, it is big enough to catch the attention of professional 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 Recipe Unlimited 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 RECP is a good investment for you, we also need to consider important company-specific fundamentals such as Recipe Unlimited’s financial health and performance track record. I urge you to continue your research by taking a look at the following: