Should You Have Chegg Inc’s (CHGG) In Your Portfolio?

For Chegg Inc’s (NYSE:CHGG) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as CHGG. 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 second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not every stock is exposed 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.

View our latest analysis for Chegg

An interpretation of CHGG’s beta

With a beta of 1.82, Chegg is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, CHGG 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.

NYSE:CHGG Income Statement Nov 28th 17
NYSE:CHGG Income Statement Nov 28th 17

How does CHGG’s size and industry impact its risk?

With a market cap of USD $1.62B, CHGG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, CHGG also operates in the diversified consumer services industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the diversified consumer services industry, relative to those more well-established firms in a more defensive industry. This is consistent with CHGG’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

How CHGG’s assets could affect its 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 CHGG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, CHGG 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. However, this is the opposite to what CHGG’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

You could benefit from higher returns during times of economic growth by holding onto CHGG. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Chegg’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following: