For Pires Investments PLC’s (AIM:PIRI) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of PIRI. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce 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. 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.
See our latest analysis for PIRI
What does PIRI’s beta value mean?
With a five-year beta of 0.08, Pires Investments appears to be a less volatile company compared to the rest of the market.This means that the change in PIRI’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.PIRI’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 PIRI’s size and industry impact its risk?
A market capitalisation of GBP £762.77K puts PIRI in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, PIRI’s industry, diversified financials, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap PIRI but a low beta for the diversified financials industry. It seems as though there is an inconsistency in risks portrayed by PIRI’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 PIRI’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 test PIRI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint.Given that fixed assets make up less than a third of the company’s total assets, PIRI doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.Thus, we can expect PIRI 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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto PIRI. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? Before you buy PIRI, you should look at the stock in conjunction with their current portfolio holdings. PIRI may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Pires Investments for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Pires Investments anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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