If you are looking to invest in Cadiz Inc’s (NASDAQ:CDZI), 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. CDZI 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 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.
What is CDZI’s market risk?
Cadiz’s beta of 0.47 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in CDZI’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. CDZI’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.
Could CDZI’s size and industry cause it to be more volatile?
A market capitalisation of US$318.09M puts CDZI in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the water utilities industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap CDZI but a low beta for the water utilities industry. This is an interesting conclusion, since its size suggests CDZI should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can CDZI’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 CDZI’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%, CDZI seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of CDZI indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what CDZI’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto CDZI. 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. Depending on the composition of your portfolio, CDZI may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether CDZI is a good investment for you, we also need to consider important company-specific fundamentals such as Cadiz’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- 1. Financial Health: Is CDZI’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 CDZI 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 CDZI’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.