If you are looking to invest in Alpha Peak Leisure Inc’s (CVE:AAP), 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. Generally, an investor should consider two types of risk that impact the market value of AAP. 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 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 every stock is exposed 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. 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.
What does AAP’s beta value mean?
With a beta of 1.06, Alpha Peak Leisure is a stock that tends to see greater volatility than the market at large. Based on this beta value, AAP 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.
How does AAP’s size and industry impact its risk?
AAP, with its market capitalisation of CA$3.96m, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, AAP’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 consistent with AAP’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How AAP’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 AAP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since AAP’s fixed assets are only 21.89% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts AAP’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of AAP’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 AAP. What I have not mentioned in my article here are important company-specific fundamentals such as Alpha Peak Leisure’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Are AAP’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 AAP 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 AAP’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 email@example.com.