Hallmark Financial Services Inc (NASDAQ:HALL): Risks You Need To Consider Before Buying

If you are looking to invest in Hallmark Financial Services Inc’s (NASDAQ:HALL), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as HALL. 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 popular measure of market risk for a stock is its beta, and the market as a whole 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.

What does HALL's beta value mean?

Hallmark Financial Services’s beta of 0.84 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in HALL'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. HALL's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

Could HALL's size and industry cause it to be more volatile?

HALL, with its market capitalisation of US$184.12M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, HALL also operates in the insurance industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap HALL but a low beta for the insurance industry. This is an interesting conclusion, since both HALL’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How HALL's assets could affect its 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 HALL’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 HALL's operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.

What this means for you:

You may reap the benefit of muted movements during times of economic decline by holding onto HALL. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. What I have not mentioned in my article here are important company-specific fundamentals such as Hallmark Financial Services’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

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