How New Age Beverages Corporation (NASDAQ:NBEV) Can Impact Your Portfolio Volatility

If you are a shareholder in New Age Beverages Corporation’s (NASDAQ:NBEV), 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 NBEV. 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. 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.

What is NBEV’s market risk?

New Age Beverages has a beta of 3.98, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, NBEV can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Does NBEV's size and industry impact the expected beta?

NBEV, with its market capitalisation of US$110.42M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, NBEV’s industry, beverage, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap NBEV but a low beta for the beverage industry. This is an interesting conclusion, since its industry suggests NBEV should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can NBEV'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 test NBEV’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since NBEV’s fixed assets are only 14.18% 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 NBEV 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 NBEV’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 NBEV'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 NBEV. What I have not mentioned in my article here are important company-specific fundamentals such as New Age Beverages’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for NBEV’s future growth? Take a look at our free research report of analyst consensus for NBEV’s outlook.
2. Past Track Record: Has NBEV 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 NBEV'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.