Can CW Group Holdings Limited (HKG:1322) Improve Your Portfolio Returns?

If you are a shareholder in CW Group Holdings Limited’s (HKG:1322), 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 1322. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as 1322, because it is rare that an entire industry collapses at once. 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 every stock is exposed 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

View our latest analysis for CW Group Holdings

What is 1322’s market risk?

CW Group Holdings’s five-year beta of 1.05 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, 1322 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.

SEHK:1322 Income Statement Export July 31st 18
SEHK:1322 Income Statement Export July 31st 18

Does 1322’s size and industry impact the expected beta?

A market capitalisation of HK$166.09m puts 1322 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 1322 also operates in the machinery 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 machinery industry, relative to those more well-established firms in a more defensive industry. This is consistent with 1322’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can 1322’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 1322’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 is virtually non-existent in 1322’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts 1322’s current beta value which indicates an above-average volatility.

What this means for you:

You could benefit from higher returns during times of economic growth by holding onto 1322. 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 CW Group Holdings’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for 1322’s future growth? Take a look at our free research report of analyst consensus for 1322’s outlook.
  2. Past Track Record: Has 1322 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 1322’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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.