For Coffee Holding Co Inc’s (NASDAQ:JVA) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. JVA 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.
An interpretation of JVA's beta
Coffee Holding has a beta of 1.58, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, JVA may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does JVA's size and industry impact its risk?
With a market cap of USD $26.08M, JVA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the food products industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of JVA, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from JVA’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is JVA's cost structure indicative of a high 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 JVA’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, JVA appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect JVA to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, JVA’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from higher returns from JVA during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand.
Are you a potential investor? I recommend that you look into JVA's fundamental factors such as its current valuation and financial health as well. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. JVA may be a great investment during times of economic growth.
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 Coffee Holding 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 Coffee Holding 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.