Should You Have Universal Health Realty Income Trust's (UHT) In Your Portfolio?

For Universal Health Realty Income Trust’s (NYSE:UHT) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as UHT. 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. 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.

An interpretation of UHT's beta

With a five-year beta of 0.39, Universal Health Realty Income Trust appears to be a less volatile company compared to the rest of the 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, UHT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

How does UHT's size and industry impact its risk?

With a market cap of $1.01B, UHT 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 reits 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 UHT but a low beta for the reits industry. It seems as though there is an inconsistency in risks portrayed by UHT’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How UHT'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 examine UHT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. UHT's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of UHT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts UHT’s current beta value which indicates a below-average volatility.

What this means for you:

UHT 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 UHT is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Universal Health Realty Income 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 UHT’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 UHT 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 UHT'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.