Should You Be Holding Bombardier Inc (TSE:BBD.B) Right Now?

If you are looking to invest in Bombardier Inc’s (TSX:BBD.B), 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 BBD.B. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as BBD.B, because it is rare that an entire industry collapses at once. 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 all stocks are expose 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. 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.

What is BBD.B’s market risk?

With a five-year beta of 0.78, Bombardier appears to be a less volatile company compared to the rest of the market. This means that the change in BBD.B's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. BBD.B’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.

Could BBD.B's size and industry cause it to be more volatile?

BBD.B has a market capitalization of CA$10.12B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. However, BBD.B operates in the aerospace & defense industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of BBD.B, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests BBD.B should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How BBD.B's assets could affect its 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 BBD.B’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, BBD.B appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect BBD.B to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. However, this is the opposite to what BBD.B’s actual beta value suggests, which is lower stock volatility relative to the market.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto BBD.B. 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, BBD.B may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether BBD.B is a good investment for you, we also need to consider important company-specific fundamentals such as Bombardier’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for BBD.B’s future growth? Take a look at our free research report of analyst consensus for BBD.B’s outlook.
2. Past Track Record: Has BBD.B 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 BBD.B'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.