If you are looking to invest in Craft Brew Alliance Inc’s (NASDAQ:BREW), 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. BREW 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. 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 BREW's beta
With a five-year beta of 0.48, Craft Brew Alliance appears to be a less volatile company compared to the rest of the market. 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. BREW’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does BREW's size and industry impact its risk?
With a market cap of USD $343.43M, BREW 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 beverages 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 BREW, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from BREW’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can BREW's asset-composition point to a higher 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 examine BREW’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, BREW seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect BREW 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 BREW’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? BREW 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 BREW 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, BREW 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 BREW, 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 Craft Brew Alliance 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 Craft Brew Alliance 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.