For PCI-PAL PLC’s (AIM:PCIP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as PCIP. 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. 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. 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.
View our latest analysis for PCI-PALWhat does PCIP’s beta value mean?
PCI-PAL’s beta of 0.99 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, PCIP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could PCIP’s size and industry cause it to be more volatile?
PCIP, with its market capitalisation of UK£22.13M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, PCIP also operates in the it industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the it 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 PCIP’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.
How PCIP’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 PCIP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since PCIP’s fixed assets are only 1.57% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect PCIP 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:
You may reap the benefit of muted movements during times of economic decline by holding onto PCIP. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. What I have not mentioned in my article here are important company-specific fundamentals such as PCI-PAL’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- 1. Financial Health: Is PCIP’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 PCIP 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 PCIP’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.