How Does Perma-Fix Environmental Services Inc (PESI) Affect Your Portfolio Returns?
For Perma-Fix Environmental Services Inc’s (NASDAQ:PESI) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. PESI 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 broad market index represents a beta value 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.
Check out our latest analysis for Perma-Fix Environmental Services
What is PESI’s market risk?
Perma-Fix Environmental Services’s beta of 0.89 indicates that the company is less volatile relative to the diversified market portfolio. 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, PESI appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could PESI's size and industry cause it to be more volatile?
With a market cap of USD $45.10M, PESI 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 commercial services and supplies industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap PESI but a low beta for the commercial services and supplies industry. This is an interesting conclusion, since both PESI’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is PESI'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 PESI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, PESI seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect PESI 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. Similarly, PESI’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto PESI. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into PESI.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 Perma-Fix Environmental Services 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 Perma-Fix Environmental Services 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.
