Can Soho Development SA. (WSE:SHD) Improve Your Portfolio Returns?

For Soho Development SA.’s (WSE:SHD) 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 SHD. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as SHD, 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.

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 Soho Development

What does SHD’s beta value mean?

With a five-year beta of 0.56, Soho Development appears to be a less volatile company compared to the rest of the market. 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. SHD’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.

WSE:SHD Income Statement Mar 28th 18
WSE:SHD Income Statement Mar 28th 18

How does SHD’s size and industry impact its risk?

A market capitalisation of ZŁ100.94M puts SHD in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the capital markets industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the capital markets 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 SHD’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Can SHD’s asset-composition point to a higher 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 examine SHD’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. SHD’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 SHD indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts SHD’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 SHD. 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, SHD may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether SHD is a good investment for you, we also need to consider important company-specific fundamentals such as Soho Development’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Is SHD’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 SHD 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 SHD’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.