If you are a shareholder in New York REIT Inc’s (NYSE:NYRT), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. NYRT 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 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.
An interpretation of NYRT’s beta
New York REIT’s beta of 0.53 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in NYRT’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. Based on this beta value, NYRT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does NYRT’s size and industry impact its risk?
NYRT, with its market capitalisation of USD $675.08M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the reits 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 reits 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 NYRT’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.
How NYRT’s assets could affect its 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 NYRT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, NYRT appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of NYRT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts NYRT’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? NYRT 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 NYRT is valuable to lower your risk of market exposure, in particular, during times of economic decline. For more company-specific research on NYRT, check out our our free analysis plaform here.
Are you a potential investor? Before you buy NYRT, you should look at the stock in conjunction with their current portfolio holdings. NYRT 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. You can examine these factors in our free fundamental research report for NYRT 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.