If you are looking to invest in Strad Energy Services Ltd’s (TSX:SDY), 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 SDY. 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 all stocks are expose 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.View our latest analysis for Strad Energy Services
What is SDY’s market risk?
Strad Energy Services’s beta of 0.75 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in SDY’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. Based on this beta value, SDY appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does SDY’s size and industry impact the expected beta?
A market capitalisation of CA$95.84M puts SDY in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, SDY’s industry, energy services, 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 energy services industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by SDY’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is SDY’s cost structure indicative of a high 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 SDY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, SDY appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of SDY indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what SDY’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 SDY. 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, SDY may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Strad Energy Services’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is SDY’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 SDY 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 SDY’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.