For Sabine Royalty Trust’s (NYSE:SBR) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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.
An interpretation of SBR’s beta
Sabine Royalty Trust’s beta of 0.17 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in SBR’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. SBR’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 SBR’s size and industry impact the expected beta?
With a market cap of US$658.26M, SBR 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 oil and gas 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 SBR but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by SBR’s size and industry relative to its actual beta value.
Can SBR’s asset-composition point to a higher 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 SBR’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 an insignificant portion of total assets, SBR doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect SBR 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:
SBR 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 SBR is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Sabine Royalty Trust’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is SBR’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 SBR 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 SBR’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.