If you are looking to invest in Reed's Inc’s (AMEX:REED), 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. REED 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. 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.
What does REED's beta value mean?
Reed's’s beta of 0.7 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. REED's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Does REED's size and industry impact the expected beta?
REED, with its market capitalisation of USD $34.06M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, REED’s industry, beverages, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of REED, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from REED’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can REED'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 examine REED’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, REED seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of REED indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts REED’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? REED 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 REED is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, REED 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 REED, 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 Reed's 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 Reed's 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.