Sabine Royalty Trust (NYSE:SBR): How Does It Impact Your Portfolio?

If you are a shareholder in Sabine Royalty Trust’s (NYSE:SBR), 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 SBR. 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 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. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta 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.

View our latest analysis for Sabine Royalty Trust

What does SBR’s beta value mean?

Sabine Royalty Trust’s beta of 0.25 indicates that the stock value will be less variable compared to the whole stock market. 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. SBR’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.

NYSE:SBR Income Statement Jan 31st 18
NYSE:SBR Income Statement Jan 31st 18

Does SBR’s size and industry impact the expected beta?

A market capitalisation of $673.57M puts SBR in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, SBR also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap SBR but a low beta for the oil and gas industry. This is an interesting conclusion, since both SBR’s size and industry indicates the stock should have a higher beta than it currently has.

Is SBR’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 SBR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in SBR’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect SBR 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. Similarly, SBR’s beta value conveys the same message.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto SBR. 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, SBR may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Sabine Royalty Trust’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

  • 1. Financial Health: Is SBR’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 SBR 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 SBR’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.