If you are a shareholder in Art's-Way Manufacturing Co Inc’s (NASDAQ:ARTW), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures ARTW’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 market as a whole represents a beta 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.
An interpretation of ARTW's beta
Art's-Way Manufacturing’s beta of 0.35 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, ARTW appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could ARTW's size and industry cause it to be more volatile?
With a market cap of USD $9.99M, ARTW falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, ARTW also operates in the machinery 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 machinery 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 ARTW’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 ARTW'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 ARTW’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. ARTW'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 ARTW 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 ARTW’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? ARTW may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as ARTW is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Before you buy ARTW, you should look at the stock in conjunction with their current portfolio holdings. ARTW may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping 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 Art's-Way Manufacturing 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 Art's-Way Manufacturing 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.