If you are a shareholder in Société Internationale de Plantations d’Hévéas Société Anonyme’s (EPA:SIPH), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as SIPH. 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 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
An interpretation of SIPH’s beta
With a five-year beta of 0.90, Société Internationale de Plantations d’Hévéas Société Anonyme appears to be a less volatile company compared to the rest of the market. If historic patterns persist, the stock is likely to exhibit muted movements in both the downside and upside, in response to changing economic conditions, relative to the general market. Based on this beta value, SIPH appears to be a stock that an investor with a high-beta portfolio may consider to produce overall returns that are less volatile.
Does SIPH’s size and industry impact the expected beta?
A market capitalisation of €420.05m puts SIPH in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the chemicals industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap SIPH but a low beta for the chemicals industry. This is an interesting conclusion, since both SIPH’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.
How SIPH’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 test SIPH’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, SIPH seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of SIPH indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts SIPH’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto SIPH. 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. Depending on the composition of your portfolio, SIPH may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether SIPH is a good investment for you, we also need to consider important company-specific fundamentals such as Société Internationale de Plantations d’Hévéas Société Anonyme’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for SIPH’s future growth? Take a look at our free research report of analyst consensus for SIPH’s outlook.
- Past Track Record: Has SIPH 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 SIPH’s historicals for more clarity.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.