For Northamber plc’s (AIM:NAR) 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 NAR. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as NAR, because it is rare that an entire industry collapses at once. 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 all stocks are expose to the same level 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. 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 NorthamberAn interpretation of NAR’s beta
With a five-year beta of 0.15, Northamber appears to be a less volatile company compared to the rest of the market. This means that the change in NAR’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, NAR 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 NAR’s size and industry impact its risk?
A market capitalisation of £7.74M puts NAR in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, NAR’s industry, electronic equipment, instruments and components, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the electronic equipment, instruments and components industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both NAR’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can NAR’s asset-composition point to a higher 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 NAR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. NAR’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of NAR indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts NAR’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto NAR. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, NAR may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Northamber’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 NAR’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 NAR 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 NAR’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.