For GTI Holdings Limited’s (SEHK:3344) 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 3344. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your 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. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.See our latest analysis for GTI Holdings
What is 3344’s market risk?
With a five-year beta of 0.43, GTI Holdings appears to be a less volatile company compared to the rest of the market. This means that the change in 3344’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, 3344 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does 3344’s size and industry impact the expected beta?
A market capitalisation of HK$1.59B puts 3344 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, 3344’s industry, luxury, 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 luxury industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both 3344’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is 3344’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 examine 3344’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, 3344 appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect 3344 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. However, this is the opposite to what 3344’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
3344 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 3344 is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether 3344 is a good investment for you, we also need to consider important company-specific fundamentals such as GTI Holdings’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 3344’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 3344 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 3344’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.