If you are looking to invest in ADDvantage Technologies Group Inc’s (NASDAQ:AEY), 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. There are two types of risks that affect the market value of a listed company such as AEY. 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.
Not all stocks are expose to the same level 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.View our latest analysis for ADDvantage Technologies Group
What is AEY’s market risk?
ADDvantage Technologies Group’s beta of 0.7 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, AEY appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could AEY’s size and industry cause it to be more volatile?
AEY, with its market capitalisation of US$13.29M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AEY also operates in the electronic industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap AEY but a low beta for the electronic industry. It seems as though there is an inconsistency in risks portrayed by AEY’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is AEY’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 test AEY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, AEY appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of AEY indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what AEY’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto AEY. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, AEY may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether AEY is a good investment for you, we also need to consider important company-specific fundamentals such as ADDvantage Technologies Group’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is AEY’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.
- Past Track Record: Has AEY 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 AEY’s historicals for more clarity.
- 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.