Should You Be Concerned About P&F Industries Inc’s (PFIN) Risks?
If you are looking to invest in P&F Industries Inc’s (NASDAQ:PFIN), 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. PFIN 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. Different characteristics of a stock expose it to various levels 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.
Check out our latest analysis for P&F Industries
An interpretation of PFIN's beta
With a five-year beta of 0.37, P&F Industries appears to be a less volatile company compared to the rest of the market. This means that the change in PFIN'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, PFIN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could PFIN's size and industry cause it to be more volatile?
A market capitalisation of USD $25.92M puts PFIN in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, PFIN also operates in the household durables industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the household durables 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 PFIN’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is PFIN'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 examine PFIN’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. PFIN's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect PFIN 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. This outcome contradicts PFIN’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? PFIN 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 PFIN 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, PFIN 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 PFIN, 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 P&F Industries 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 P&F Industries 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.
