For Ocean Rig UDW Inc’s (NASDAQ:ORIG) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures ORIG’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta value 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 ORIG's beta
Ocean Rig UDW’s five-year beta of 1.69 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, ORIG can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does ORIG's size and industry impact its risk?
With a market cap of USD $6.20M, ORIG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, ORIG also operates in the energy equipment and services 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 energy equipment and services industry, relative to those more well-established firms in a more defensive industry. This is consistent with ORIG’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is ORIG'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 examine ORIG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, ORIG appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of ORIG indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, ORIG’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from higher returns from ORIG during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand.
Are you a potential investor? I recommend that you look into ORIG's fundamental factors such as its current valuation and financial health as well. 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. ORIG 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 Ocean Rig UDW 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 Ocean Rig UDW 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.