If you are a shareholder in Wireless Telecom Group Inc’s (AMEX:WTT), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. WTT 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 all stocks are expose to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
What is WTT’s market risk?
Wireless Telecom Group’s beta of 0.24 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in WTT'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. WTT'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.
How does WTT's size and industry impact its risk?
WTT, with its market capitalisation of USD $37.38M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, WTT also operates in the electronic equipment, instruments and components industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap WTT but a low beta for the electronic equipment, instruments and components industry. This is an interesting conclusion, since both WTT’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.
Can WTT's asset-composition point to a higher 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 test WTT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since WTT’s fixed assets are only 19.52% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto WTT. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 Wireless Telecom 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 Wireless Telecom 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.