If you are a shareholder in Hövding Sverige AB (publ)’s (OM:HOVD), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of HOVD. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as HOVD, 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 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 Hövding Sverige
What does HOVD’s beta value mean?
Hövding Sverige’s five-year beta of 1.43 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. Based on this beta value, HOVD will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Does HOVD’s size and industry impact the expected beta?
With a market cap of KR125.37M, HOVD falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, HOVD’s industry, leisure, 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 leisure industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of HOVD’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can HOVD’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 HOVD’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, HOVD seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect HOVD 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. However, this is the opposite to what HOVD’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You may reap the gains of HOVD’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into HOVD. What I have not mentioned in my article here are important company-specific fundamentals such as Hövding Sverige’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 HOVD’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 HOVD 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 HOVD’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.