If you’re interested in CAI International, Inc. (NYSE: CAI), 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 sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exaggerated or uncorrelated 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. 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 CAI’s beta value tells investors
Given that it has a beta of 1.98, we can surmise that the CAI International share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that CAI International is likely to rise strongly in times of greed, but sell-off in times of fear. 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 CAI International fares in that regard, below.
Does CAI’s size influence the expected beta?
CAI International is a rather small company. It has a market capitalisation of US$254m, which means it is probably under the radar of most investors. 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:
Since CAI International 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 CAI is a good investment for you, we also need to consider important company-specific fundamentals such as CAI International’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 CAI’s future growth? Take a look at our free research report of analyst consensus for CAI’s outlook.
- Past Track Record: Has CAI 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 CAI’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how CAI measures up against other companies on valuation. You could start with this free list of prospective options.