Does Magal Security Systems Ltd (NASDAQ:MAGS) Go Up With The Market?

If you are looking to invest in Magal Security Systems Ltd’s (NASDAQ:MAGS), 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. Generally, an investor should consider two types of risk that impact the market value of MAGS. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as MAGS, 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

What does MAGS's beta value mean?

Magal Security Systems’s beta of 0.89 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in MAGS'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. MAGS’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.

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

MAGS, with its market capitalisation of US$121.38M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the electronic 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 MAGS but a low beta for the electronic industry. It seems as though there is an inconsistency in risks portrayed by MAGS’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.

Is MAGS'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 examine MAGS’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, MAGS doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect MAGS 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, MAGS’s beta value conveys the same message.

What this means for you:

You may reap the benefit of muted movements during times of economic decline by holding onto MAGS. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether MAGS is a good investment for you, we also need to consider important company-specific fundamentals such as Magal Security Systems’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 MAGS’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 MAGS 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 MAGS'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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.