If you are a shareholder in PCI-PAL PLC’s (AIM:PCIP), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as PCIP. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. 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.
Not all stocks are expose 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. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.Check out our latest analysis for PCI-PAL
An interpretation of PCIP’s beta
PCI-PAL has a beta of 1.21, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, PCIP 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.
Could PCIP’s size and industry cause it to be more volatile?
A market capitalisation of UK£16.81M puts PCIP in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, PCIP also operates in the it industry, which has commonly demonstrated strong reactions to market-wide shocks. 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 PCIP’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is PCIP’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. 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. Considering fixed assets account for less than a third of the company’s overall assets, PCIP seems to have a smaller dependency on fixed costs to generate revenue. 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. However, this is the opposite to what PCIP’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto PCIP. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. 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 highly recommend you to complete your research by taking a look at the following:
- 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.
- 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.
- 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.