If you are looking to invest in Permian Basin Royalty Trust’s (NYSE:PBT), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole 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.
What does PBT’s beta value mean?
With a five-year beta of 0.63, Permian Basin Royalty Trust appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, PBT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does PBT’s size and industry impact its risk?
PBT, with its market capitalisation of USD $409.69M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, PBT’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both PBT’s size and industry indicates the stock should have a higher beta than it currently has.
How PBT’s assets could affect its 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 PBT’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 is virtually non-existent in PBT’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, PBT’s beta value conveys the same message.
What this means for you:
Are you a shareholder? PBT 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 PBT is valuable to lower your risk of market exposure, in particular, during times of economic decline. For next steps, take a look at PBT’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.
Are you a potential investor? Depending on the composition of your portfolio, PBT may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in PBT, as well as where we are in the current economic cycle. You can examine these factors in our free fundamental research report for PBT 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.