For Gyrodyne LLC’s (NASDAQ:GYRO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as GYRO. 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 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 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 Gyrodyne
An interpretation of GYRO’s beta
Gyrodyne’s beta of 0.01 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. Based on this beta value, GYRO appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does GYRO’s size and industry impact the expected beta?
With a market cap of US$28.48M, GYRO falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, GYRO also operates in the real estate industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap GYRO but a low beta for the real estate industry. This is an interesting conclusion, since both GYRO’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.
Is GYRO’s cost structure indicative of a high 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 GYRO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, GYRO doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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 could benefit from lower risk during times of economic decline by holding onto GYRO. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether GYRO is a good investment for you, we also need to consider important company-specific fundamentals such as Gyrodyne’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is GYRO’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.
- 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.