If you are looking to invest in American Electric Technologies Inc’s (NASDAQ:AETI), 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. The beta measures AETI’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, 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.
What does AETI's beta value mean?
American Electric Technologies’s beta of 0.62 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. AETI’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 AETI's size and industry impact its risk?
A market capitalisation of USD $12.92M puts AETI in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, AETI also operates in the electrical equipment industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the electrical equipment industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by AETI’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 AETI'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 examine AETI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. AETI's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of AETI 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 AETI’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto AETI. 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, AETI may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Depending on the composition of your portfolio, AETI may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in AETI, as well as where we are in the current economic cycle.
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 American Electric Technologies 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 American Electric Technologies anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.