If you are a shareholder in Superior Plus Corp’s (TSE:SPB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as SPB. 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.
How volatile is SPB’s share price?
Superior Plus’s five-year beta of 1.22 means that the company’s value is expected to be more volatile than average. Based on this beta value, SPB 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.
Does SPB's size and industry impact the expected beta?
SPB, with its market capitalisation of CA$2.27b, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the gas utilities industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap SPB but a low beta for the gas utilities industry. This is an interesting conclusion, since its industry suggests SPB should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How SPB'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 SPB’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%, SPB 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 SPB indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, SPB’s beta value conveys the same message.
What this means for you:
You could benefit from higher returns from SPB during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. In order to fully understand whether SPB is a good investment for you, we also need to consider important company-specific fundamentals such as Superior Plus’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for SPB’s future growth? Take a look at our free research report of analyst consensus for SPB’s outlook.
- Past Track Record: Has SPB 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 SPB'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 firstname.lastname@example.org.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.