For Yellow Brick Road Holdings Limited’s (ASX:YBR) 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 YBR. 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 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. 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.Check out our latest analysis for Yellow Brick Road Holdings
What is YBR’s market risk?
With a beta of 1.11, Yellow Brick Road Holdings 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. According to this value of beta, YBR 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.
Does YBR’s size and industry impact the expected beta?
With a market cap of AUD A$42.32M, YBR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, YBR’s industry, diversified financial services, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of YBR’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can YBR’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 examine YBR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in YBR’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect YBR 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 outcome contradicts YBR’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of YBR’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 YBR. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Yellow Brick Road Holdings’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Financial Health: Is YBR’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has YBR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of YBR’s historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.