If you are a shareholder in Appliance Recycling Centers of America Inc’s (NASDAQ:ARCI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as ARCI. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as ARCI, because it is rare that an entire industry collapses at once. 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 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.View our latest analysis for Appliance Recycling Centers of America
What does ARCI’s beta value mean?
Appliance Recycling Centers of America’s beta of 0.09 indicates that the company is less volatile relative to the diversified market portfolio. 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. ARCI’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.
Could ARCI’s size and industry cause it to be more volatile?
ARCI, with its market capitalisation of US$6.88M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, ARCI also operates in the specialty retail industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ARCI but a low beta for the specialty retail industry. This is an interesting conclusion, since both ARCI’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 ARCI’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 ARCI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since ARCI’s fixed assets are only 26.44% 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 ARCI 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, ARCI’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 ARCI. 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 ARCI is a good investment for you, we also need to consider important company-specific fundamentals such as Appliance Recycling Centers of America’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- 1. Financial Health: Is ARCI’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 ARCI 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 ARCI’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.