How RHC Capital Corporation (CVE:RHC) Can Impact Your Portfolio Volatility

If you are looking to invest in RHC Capital Corporation’s (TSXV:RHC), 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. Broadly speaking, there are two types of risk you should consider when investing in stocks such as RHC. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as RHC, 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. 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 RHC Capital

An interpretation of RHC’s beta

RHC Capital’s beta of 0.46 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. Based on this beta value, RHC appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

TSXV:RHC Income Statement Apr 19th 18
TSXV:RHC Income Statement Apr 19th 18

Could RHC’s size and industry cause it to be more volatile?

With a market cap of CA$10.57M, RHC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, RHC’s industry, oil and gas, 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 RHC but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by RHC’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is RHC’s cost structure indicative of a high 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 examine RHC’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, RHC seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of RHC 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 RHC’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 RHC. 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, RHC may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether RHC is a good investment for you, we also need to consider important company-specific fundamentals such as RHC Capital’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 RHC’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 RHC 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 RHC’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.