Can Aberdeen International Inc (TSE:AAB) Improve Your Portfolio Returns?

If you are looking to invest in Aberdeen International Inc’s (TSX:AAB), 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. There are two types of risks that affect the market value of a listed company such as AAB. 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.

Not every stock is exposed 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.

View our latest analysis for Aberdeen International

What does AAB’s beta value mean?

With a beta of 2.25, Aberdeen International is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, AAB 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.

TSX:AAB Income Statement Apr 23rd 18
TSX:AAB Income Statement Apr 23rd 18

How does AAB’s size and industry impact its risk?

AAB, with its market capitalisation of CA$15.85M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AAB also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of AAB’s beta value discussed above.

Can AAB’s asset-composition point to a higher 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 AAB’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 AAB’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect AAB 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. This outcome contradicts AAB’s current beta value which indicates an above-average volatility.

What this means for you:

You could benefit from higher returns during times of economic growth. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. It’s always wise to take into account your portfolio sensitivity to the market before you invest in AAB, as well as where we are in the current economic cycle. In order to fully understand whether AAB is a good investment for you, we also need to consider important company-specific fundamentals such as Aberdeen International’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 AAB’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 AAB 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 AAB’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.