For Petrel Resources Plc’s (LON:PET) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of PET. 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.
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.See our latest analysis for Petrel Resources
An interpretation of PET’s beta
With a five-year beta of 0.79, Petrel Resources appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, PET appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does PET’s size and industry impact its risk?
PET, with its market capitalisation of UK£1.89m, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, PET’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 PET but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by PET’s size and industry relative to its actual beta value.
Can PET’s asset-composition point to a higher 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 PET’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, PET doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect PET 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
PET may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as PET is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Petrel Resources’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is PET’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 PET 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 PET’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.