U.S. Markets closed

Should You Be Concerned About Preferred Bank's (NASDAQ:PFBC) Historical Volatility?

Simply Wall St

Want to participate in a short research study ? Help shape the future of investing tools and you could win a $250 gift card!

Anyone researching Preferred Bank ( NASDAQ:PFBC ) might want to consider the historical volatility of the share price. 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 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. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.

See our latest analysis for Preferred Bank

What we can learn from PFBC's beta value

Given that it has a beta of 1.16, we can surmise that the Preferred Bank share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Preferred Bank shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it's also important to consider whether Preferred Bank is growing earnings and revenue. You can take a look for yourself, below.

NasdaqGS:PFBC Income Statement, May 8th 2019

Does PFBC's size influence the expected beta?

Preferred Bank is a small company, but not tiny and little known. It has a market capitalisation of US$741m, which means it would be on the radar of intstitutional investors. 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:

Since Preferred Bank tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether PFBC is a good investment for you, we also need to consider important company-specific fundamentals such as Preferred Bank’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook : What are well-informed industry analysts predicting for PFBC’s future growth? Take a look at our free research report of analyst consensus for PFBC’s outlook.
  2. Past Track Record : Has PFBC 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 PFBC's historicals for more clarity.
  3. Other Interesting Stocks : It's worth checking to see how PFBC measures up against other companies on valuation. You could start with this free list of prospective options .

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.