If you are looking to invest in KVH Industries Inc’s (NASDAQ:KVHI), 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. KVHI is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole 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 KVHI's beta value mean?
With a five-year beta of 0.77, KVH Industries appears to be a less volatile company compared to the rest of the market. This means that the change in KVHI's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. KVHI’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 KVHI's size and industry impact its risk?
KVHI, with its market capitalisation of USD $209.33M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the communications equipment industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the communications 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 KVHI’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.
Can KVHI's asset-composition point to a higher 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 KVHI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. KVHI'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. Thus, we can expect KVHI 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. However, this is the opposite to what KVHI’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 KVHI. 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, KVHI may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy KVHI, you should look at the stock in conjunction with their current portfolio holdings. KVHI 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 KVH Industries 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 KVH Industries 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.