If you are looking to invest in Concord Medical Services Holdings Limited’s (NYSE:CCM), 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 CCM. 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 second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Different characteristics of a stock expose it to various levels 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. 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.
What does CCM's beta value mean?
Concord Medical Services Holdings has a beta of 1.03, 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,CCM will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could CCM's size and industry cause it to be more volatile?
A market capitalisation of USD $174.26M puts CCM in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the healthcare equipment and services 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 CCM, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests CCM should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is CCM's cost structure indicative of a high 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 CCM’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, CCM seems to have a smaller dependency on fixed costs to generate revenue.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. However, this is the opposite to what CCM’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of CCM's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into CCM.
Are you a potential investor? I recommend that you look into CCM's fundamental factors such as its current valuation and financial health. 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. CCM 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 Concord Medical Services Holdings 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 Concord Medical Services Holdings 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.