For Pizza Pizza Royalty Corp’s (TSX:PZA) 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 PZA. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as PZA, 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 widely-used metric to measure a stock’s market risk is beta, and the broad market index 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.View our latest analysis for Pizza Pizza Royalty
What does PZA’s beta value mean?
Pizza Pizza Royalty’s beta of 0.84 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in PZA’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. PZA’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.
Does PZA’s size and industry impact the expected beta?
PZA, with its market capitalisation of CA$431.68M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, PZA’s industry, hospitality, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the hospitality industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both PZA’s size and industry indicates the stock should have a higher beta than it currently has.
How PZA’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 test PZA’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in PZA’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect PZA 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. Similarly, PZA’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PZA. 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, PZA may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether PZA is a good investment for you, we also need to consider important company-specific fundamentals such as Pizza Pizza Royalty’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is PZA’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.
- Past Track Record: Has PZA 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 PZA’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.