If you are a shareholder in Orion Equities Limited’s (ASX:OEQ), 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 OEQ. 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 other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index 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.
Check out our latest analysis for Orion Equities
What does OEQ’s beta value mean?
Orion Equities’s beta of 0.94 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, OEQ appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does OEQ’s size and industry impact the expected beta?
With a market cap of AUD $2.66M, OEQ falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, OEQ also operates in the diversified financials industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap OEQ but a low beta for the diversified financials industry. It seems as though there is an inconsistency in risks portrayed by OEQ’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.
How OEQ’s assets could affect its 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 OEQ’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, OEQ seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect OEQ 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, OEQ’s beta value conveys the same message.
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 OEQ. 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? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 Orion Equities 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 Orion Equities 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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