If you are looking to invest in Canadian Apartment Properties Real Estate Investment Trust’s (TSX:CAR.UN), 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. CAR.UN 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. 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 CAR.UN’s market risk?
Canadian Apartment Properties Real Estate Investment Trust’s beta of 0.14 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, CAR.UN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could CAR.UN’s size and industry cause it to be more volatile?
CAR.UN has a market capitalization of CA$5.41B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. However, CAR.UN operates in the reits industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of CAR.UN, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from CAR.UN’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can CAR.UN’s asset-composition point to a higher 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 CAR.UN’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. CAR.UN’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 CAR.UN 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 CAR.UN’s current beta value which indicates a below-average volatility.
What this means for you:
CAR.UN 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 CAR.UN is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Canadian Apartment Properties Real Estate Investment Trust’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CAR.UN’s future growth? Take a look at our free research report of analyst consensus for CAR.UN’s outlook.
- Past Track Record: Has CAR.UN 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 CAR.UN’s historicals for more clarity.
- 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.