How Does ADVFN plc (AIM:AFN) Affect Your Portfolio Returns?

If you are looking to invest in ADVFN plc’s (AIM:AFN), 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 AFN. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. 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 every stock is exposed to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value 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.

See our latest analysis for AFN

What is AFN’s market risk?

With a five-year beta of 0.01, ADVFN appears to be a less volatile company compared to the rest of the market. 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. AFN’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

AIM:AFN Income Statement Oct 21st 17
AIM:AFN Income Statement Oct 21st 17

Does AFN’s size and industry impact the expected beta?

With a market cap of GBP £7.82M, AFN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, AFN’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the capital markets industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both AFN’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is AFN’s cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test AFN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since AFN’s fixed assets are only 1.43% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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, AFN’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 AFN. 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 AFN.

Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.

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 ADVFN 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 ADVFN anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.