Anyone researching Speakeasy Cannabis Club Ltd. (CSE:EASY) 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 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What does EASY’s beta value mean to investors?
Given that it has a beta of 1.67, we can surmise that the Speakeasy Cannabis Club share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Speakeasy Cannabis Club 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 Speakeasy Cannabis Club fares in that regard, below.
Could EASY’s size cause it to be more volatile?
Speakeasy Cannabis Club is a noticeably small company, with a market capitalisation of CA$48m. 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 Speakeasy Cannabis Club 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 EASY is a good investment for you, we also need to consider important company-specific fundamentals such as Speakeasy Cannabis Club’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Financial Health: Are EASY’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records?