For Wey Education Plc’s (AIM:WEY) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of WEY. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as WEY, because it is rare that an entire industry collapses at once. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.See our latest analysis for WEY
What is WEY’s market risk?
Wey Education’s beta of 0.46 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, WEY appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does WEY’s size and industry impact its risk?
WEY, with its market capitalisation of GBP £34.05M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, WEY also operates in the diversified consumer services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap WEY but a low beta for the diversified consumer services industry. It seems as though there is an inconsistency in risks portrayed by WEY’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can WEY’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 examine WEY’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since WEY’s fixed assets are only 4.43% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect WEY to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto WEY. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? Before you buy WEY, you should look at the stock in conjunction with their current portfolio holdings. WEY 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 Wey Education 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 Wey Education anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.