If you are looking to invest in The National Security Group Inc’s (NASDAQ:NSEC), 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. The beta measures NSEC’s exposure to the wider market risk, which reflects changes in economic and political factors. 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
An interpretation of NSEC’s beta
With a five-year beta of 0.23, National Security Group appears to be a less volatile company compared to the rest of the market. This means that the change in NSEC’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. NSEC’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 NSEC’s size and industry impact its risk?
NSEC, with its market capitalisation of US$39.53M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, NSEC also operates in the insurance industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the insurance industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both NSEC’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can NSEC’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 NSEC’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 that fixed assets make up less than a third of the company’s total assets, NSEC doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect NSEC to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto NSEC. 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 NSEC is a good investment for you, we also need to consider important company-specific fundamentals such as National Security Group’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is NSEC’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.
Past Track Record: Has NSEC 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 NSEC’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.