If you are a shareholder in Buhler Industries Inc’s (TSX:BUI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of BUI. 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.
Different characteristics of a stock expose it to various levels 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. 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.Check out our latest analysis for Buhler Industries
An interpretation of BUI’s beta
Buhler Industries’s beta of 0.3 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. BUI’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.
How does BUI’s size and industry impact its risk?
A market capitalisation of CA$108.25M puts BUI in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, BUI’s industry, machinery, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap BUI but a low beta for the machinery industry. This is an interesting conclusion, since both BUI’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.
Can BUI’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 BUI’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%, BUI seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect BUI 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. This outcome contradicts BUI’s current beta value which indicates a below-average volatility.
What this means for you:
BUI may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as BUI is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether BUI is a good investment for you, we also need to consider important company-specific fundamentals such as Buhler Industries’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 BUI’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 BUI 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 BUI’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.