Yahoo Finance Should You Be Concerned About Louisiana-Pacific Corporation's (NYSE:LPX) Historical Volatility?
If you're interested in Louisiana-Pacific Corporation (NYSE:LPX), 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. 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 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. 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.
See our latest analysis for Louisiana-Pacific
What does LPX's beta value mean to investors?
Given that it has a beta of 1.73, we can surmise that the Louisiana-Pacific share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that Louisiana-Pacific are likely to rise strongly in times of greed, but sell off in times of fear. Beta is worth considering, but it's also important to consider whether Louisiana-Pacific is growing earnings and revenue. You can take a look for yourself, below.
How does LPX's size impact its beta?
Louisiana-Pacific is a small cap stock with a market capitalisation of US$2.0b. Most companies this size are actively traded. It has a relatively high beta, which is not unusual among small-cap stocks. Because it takes less capital to move the share price of a smaller company, actively traded small-cap stocks often have a higher beta that a similar large-cap stock.
What this means for you:
Beta only tells us that the Louisiana-Pacific 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 LPX is a good investment for you, we also need to consider important company-specific fundamentals such as Louisiana-Pacific’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for LPX’s future growth? Take a look at our free research report of analyst consensus for LPX’s outlook.
Past Track Record: Has LPX 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 LPX's historicals for more clarity.
Other Interesting Stocks: It's worth checking to see how LPX measures up against other companies on valuation. You could start with this free list of prospective options.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
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