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How Does Investing In Paringa Resources Limited (ASX:PNL) Impact The Volatility Of Your Portfolio?

If you’re interested in Paringa Resources Limited (ASX:PNL), 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. 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.

View our latest analysis for Paringa Resources

What does PNL’s beta value mean to investors?

Zooming in on Paringa Resources, we see it has a five year beta of 0.85. This is below 1, so historically its share price has been rather independent from the market. This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio’s weighted average beta is higher than 0.85. Beta is worth considering, but it’s also important to consider whether Paringa Resources is growing earnings and revenue. You can take a look for yourself, below.

ASX:PNL Income Statement Export November 16th 18
ASX:PNL Income Statement Export November 16th 18

How does PNL’s size impact its beta?

Paringa Resources is a rather small company. It has a market capitalisation of AU$86m, which means it is probably under the radar of most investors. Companies with market capitalisations around this size often show poor correlation with the broader market because market volatility is overshadowed by company specific events, or other factors. It’s worth checking to see how often shares are traded, because very small companies with very low beta values are often only thinly traded.

What this means for you:

Since Paringa Resources is not heavily influenced by market moves, its share price is probably far more dependend on company specific developments. It could pay to take a closer look at metrics such as revenue growth, earnings growth, and debt. In order to fully understand whether PNL is a good investment for you, we also need to consider important company-specific fundamentals such as Paringa Resources’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

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  1. Future Outlook: What are well-informed industry analysts predicting for PNL’s future growth? Take a look at our free research report of analyst consensus for PNL’s outlook.

  2. Past Track Record: Has PNL 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 PNL’s historicals for more clarity.

  3. Other Interesting Stocks: It’s worth checking to see how PNL measures up against other companies on valuation. You could start with this free list of prospective options.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.