If you are a shareholder in InnSuites Hospitality Trust’s (AMEX:IHT), 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 IHT. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. 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.
Not every stock is exposed to the same level 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. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.View our latest analysis for InnSuites Hospitality Trust
An interpretation of IHT’s beta
With a five-year beta of 0.04, InnSuites Hospitality Trust appears to be a less volatile company compared to the rest of the market. This means that the change in IHT’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, IHT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could IHT’s size and industry cause it to be more volatile?
With a market cap of US$20.63M, IHT falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the hospitality 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 IHT but a low beta for the hospitality industry. It seems as though there is an inconsistency in risks portrayed by IHT’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can IHT’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 IHT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, IHT appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of IHT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what IHT’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
IHT 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 IHT is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether IHT is a good investment for you, we also need to consider important company-specific fundamentals such as InnSuites Hospitality Trust’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 IHT’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 IHT 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 IHT’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.