If you are looking to invest in Northamber plc’s (AIM:NAR), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as 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 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.View our latest analysis for Northamber
An interpretation of NAR’s beta
Northamber’s beta of 0.01 indicates that the company is less volatile relative to the diversified market portfolio. 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. NAR’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could NAR’s size and industry cause it to be more volatile?
With a market cap of UK£8.31M, NAR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, NAR’s industry, electronic, 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 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 NAR’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is NAR’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 NAR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, NAR seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect NAR to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts NAR’s current beta value which indicates a below-average volatility.
What this means for you:
NAR 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 NAR is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether NAR is a good investment for you, we also need to consider important company-specific fundamentals such as Northamber’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 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.
- 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.
- 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.