If you are a shareholder in Fusion Telecommunications International Inc’s (NASDAQ:FSNN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as FSNN. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. 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.
Different characteristics of a stock expose it to various levels 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.Check out our latest analysis for Fusion Telecommunications International
An interpretation of FSNN’s beta
Fusion Telecommunications International’s five-year beta of 1.96 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, FSNN will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does FSNN’s size and industry impact its risk?
A market capitalisation of USD $56.49M puts FSNN in the category of small-cap stocks, which tends to possess higher beta than larger companies. But, FSNN’s industry, diversified telecommunication services, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of FSNN, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests FSNN should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can FSNN’s asset-composition point to a higher 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 FSNN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, FSNN seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect FSNN 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. However, this is the opposite to what FSNN’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of FSNN’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into FSNN.
Are you a potential investor? I recommend that you look into FSNN’s fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. FSNN may be a great investment during times of economic growth.
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 Fusion Telecommunications International 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 Fusion Telecommunications International anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.