If you are looking to invest in Aoxin Tianli Group Inc’s (NASDAQ:ABAC), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
What does ABAC's beta value mean?
Aoxin Tianli Group has a beta of 2.26, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, ABAC may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does ABAC's size and industry impact the expected beta?
With a market cap of USD $17.96M, ABAC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, ABAC operates in the food products industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of ABAC, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests ABAC should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is ABAC'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 ABAC’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, ABAC seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect ABAC 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 outcome contradicts ABAC’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of ABAC's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into ABAC.
Are you a potential investor? Before you buy ABAC, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. ABAC may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 Aoxin Tianli Group 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 Aoxin Tianli Group 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.