Should You Have Cheops Technology France SA's (EPA:MLCHE) In Your Portfolio?

If you are looking to invest in Cheops Technology France SA’s (ENXTPA:MLCHE), 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 MLCHE. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as MLCHE, because it is rare that an entire industry collapses at once. 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.

Different characteristics of a stock expose it to various levels 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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

What is MLCHE’s market risk?

With a beta of 1.05, Cheops Technology France 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, MLCHE 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 MLCHE's size and industry impact the expected beta?

With a market cap of €70.84M, MLCHE falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, MLCHE’s industry, it, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of MLCHE’s beta value discussed above.

Is MLCHE'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 MLCHE’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 that fixed assets make up an insignificant portion of total assets, MLCHE doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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. However, this is the opposite to what MLCHE’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

You could reap the gains of MLCHE's returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as MLCHE is valuable to pump up your returns, in particular, during times of economic growth. In order to fully understand whether MLCHE is a good investment for you, we also need to consider important company-specific fundamentals such as Cheops Technology France’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Past Track Record: Has MLCHE 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 MLCHE's historicals for more clarity.
2. 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.

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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.