If you are looking to invest in Cherokee Inc’s (NASDAQ:CHKE), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This 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.
An interpretation of CHKE’s beta
Cherokee’s beta of 1 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. Based on this beta value, CHKE 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 CHKE’s size and industry impact its risk?
CHKE, with its market capitalisation of US$11.20M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CHKE’s industry, luxury, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap CHKE but a low beta for the luxury industry. It seems as though there is an inconsistency in risks portrayed by CHKE’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 CHKE’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 test CHKE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, CHKE seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect CHKE to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto CHKE. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether CHKE is a good investment for you, we also need to consider important company-specific fundamentals such as Cherokee’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CHKE’s future growth? Take a look at our free research report of analyst consensus for CHKE’s outlook.
- Past Track Record: Has CHKE been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CHKE’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.