Should You Be Concerned About Pebble Beach Systems Group plc’s (LON:PEB) Risks?
If you are a shareholder in Pebble Beach Systems Group plc’s (AIM:PEB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 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 broad market index represents a beta value 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.
Check out our latest analysis for Pebble Beach Systems Group
What is PEB’s market risk?
Pebble Beach Systems Group’s beta of 0.19 indicates that the company is less volatile relative to the diversified market portfolio. 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. PEB’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.
Could PEB’s size and industry cause it to be more volatile?
PEB, with its market capitalisation of GBP £2.11M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the communications 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 communications 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 PEB’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.
How PEB’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 PEB’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since PEB’s fixed assets are only 4.35% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, PEB’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PEB. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether PEB is a good investment for you, we also need to consider important company-specific fundamentals such as Pebble Beach Systems Group’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Financial Health: Is PEB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has PEB 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 PEB’s historicals for more clarity.
3. 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.
