If you are a shareholder in Optibase Ltd’s (NASDAQ:OBAS), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as OBAS. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as OBAS, because it is rare that an entire industry collapses at once. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not every stock is exposed to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, 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 OBAS’s market risk?
With a five-year beta of 0.21, Optibase appears to be a less volatile company compared to the rest of the market. This means that the change in OBAS'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. OBAS’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.
Does OBAS's size and industry impact the expected beta?
With a market cap of USD $35.20M, OBAS falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the real estate industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the real estate industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by OBAS’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is OBAS'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 test OBAS’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, OBAS 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 OBAS 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 OBAS’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto OBAS. 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, OBAS may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy OBAS, you should look at the stock in conjunction with their current portfolio holdings. OBAS may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment.
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 Optibase 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 Optibase 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.