If you are looking to invest in New England Realty Associates Limited Partnership’s (AMEX:NEN), 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. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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 NEN’s beta value mean?
With a five-year beta of 0.61, New England Realty Associates Limited Partnership appears to be a less volatile company compared to the rest of the market. 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, NEN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does NEN’s size and industry impact the expected beta?
NEN, with its market capitalisation of USD $271.68M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, NEN also operates in the real estate industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap NEN but a low beta for the real estate industry. This is an interesting conclusion, since both NEN’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How NEN’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 NEN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, NEN appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect NEN to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts NEN’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? NEN 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 NEN is valuable to lower your risk of market exposure, in particular, during times of economic decline. For more company-specific research on NEN, check out our our free analysis plaform here.
Are you a potential investor? Before you buy NEN, you should look at the stock in conjunction with their current portfolio holdings. NEN 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. Continue your research on the stock with our free fundamental research report for NEN here.
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.