If you own shares in Clearway Energy, Inc. (NYSE:CWEN.A) then it's 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. 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 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 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. 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.
What does CWEN.A's beta value mean to investors?
Given that it has a beta of 1.14, we can surmise that the Clearway Energy share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Clearway Energy shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Clearway Energy's revenue and earnings in the image below.
Could CWEN.A's size cause it to be more volatile?
Clearway Energy is a reasonably big company, with a market capitalisation of US$3.4b. Most companies this size are actively traded with decent volumes of shares changing hands each day. It takes a lot of money to influence the share price of large companies like this one. That makes it interesting to note that its share price has a history of sensitivity to market volatility. There might be some aspect of the business that means profits are leveraged to the economic cycle.
What this means for you:
Since Clearway Energy 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. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Clearway Energy’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Future Outlook: What are well-informed industry analysts predicting for CWEN.A’s future growth? Take a look at our free research report of analyst consensus for CWEN.A’s outlook.
- Past Track Record: Has CWEN.A been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CWEN.A's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how CWEN.A measures up against other companies on valuation. You could start with this free list of prospective options.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.