If you are looking to invest in Emmis Communications Corporation’s (NASDAQ:EMMS), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as EMMS. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as EMMS, because it is rare that an entire industry collapses at once. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.View our latest analysis for Emmis Communications
What does EMMS’s beta value mean?
Emmis Communications’s beta of 0.73 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. EMMS’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could EMMS’s size and industry cause it to be more volatile?
A market capitalisation of USD $44.33M puts EMMS in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the media industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap EMMS but a low beta for the media industry. This is an interesting conclusion, since its size suggests EMMS should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can EMMS’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test EMMS’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, EMMS doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, EMMS’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto EMMS. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into EMMS.
Are you a potential investor? Before you buy EMMS, you should look at the stock in conjunction with their current portfolio holdings. EMMS may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Emmis Communications for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Emmis Communications anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.