If you are a shareholder in PCI-PAL PLC’s (LON:PCIP), 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 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 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 popular measure of market risk for a stock is its beta, and the market as a whole 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.
Check out our latest analysis for PCI-PALWhat does PCIP’s beta value mean?
With a beta of 1.2, PCI-PAL 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, PCIP may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does PCIP’s size and industry impact the expected beta?
PCIP, with its market capitalisation of UK£12.34m, 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. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with PCIP’s individual beta value we 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?
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 2.19% 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 outcome contradicts PCIP’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of PCIP’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into PCIP. 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.