If you are a shareholder in Hunter Group ASA’s (OB:HUNT), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as HUNT. 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.
Different characteristics of a stock expose it to various levels 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. 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 Hunter Group
What is HUNT’s market risk?
Hunter Group’s beta of 0.23 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, HUNT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could HUNT’s size and industry cause it to be more volatile?
A market capitalisation of ØRE313.47M puts HUNT in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the energy services industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap HUNT but a low beta for the energy services industry. This is an interesting conclusion, since both HUNT’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.
Is HUNT’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 test HUNT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since HUNT’s fixed assets are only 10.75% 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 HUNT 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto HUNT. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. What I have not mentioned in my article here are important company-specific fundamentals such as Hunter Group’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is HUNT’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 HUNT 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 HUNT’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.