If you are looking to invest in SandRidge Permian Trust’s (NYSE:PER), 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. PER 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. Not every stock is exposed 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
An interpretation of PER’s beta
SandRidge Permian Trust’s beta of 0.84 indicates that the company is less volatile relative to the diversified market portfolio. 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, PER appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does PER’s size and industry impact the expected beta?
With a market cap of US$118.13M, PER falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, PER’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap PER but a low beta for the oil and gas industry. This is an interesting conclusion, since both PER’s size and industry indicates the stock should have a higher beta than it currently has.
Can PER’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 PER’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, PER doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect PER 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, PER’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PER. 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, PER may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether PER is a good investment for you, we also need to consider important company-specific fundamentals such as SandRidge Permian Trust’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is PER’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 PER 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 PER’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.