Can Cavalier Corporation Limited (NZSE:CAV) Improve Your Portfolio Returns?
If you are looking to invest in Cavalier Corporation Limited’s (NZSE:CAV), 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. Broadly speaking, there are two types of risk you should consider when investing in stocks such as CAV. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not every stock is exposed to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, 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.
View our latest analysis for Cavalier
What is CAV’s market risk?
With a five-year beta of 0.25, Cavalier 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.CAV'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 CAV's size and industry impact its risk?
With a market cap of NZD $19.92M, CAV falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, CAV’s industry, consumer durables and apparel, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the consumer durables and apparel industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both CAV’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How CAV'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 CAV’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint.Given a fixed to total assets ratio of over 30%, CAV 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 CAV indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts CAV’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? CAV 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 CAV 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, CAV 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 CAV, 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 Cavalier 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 Cavalier 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.
