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What Are The Drivers Of ClearOne Inc’s (CLRO) Risks?

For ClearOne Inc’s (NASDAQ:CLRO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as CLRO. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Different characteristics of a stock expose it to various levels 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. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

Check out our latest analysis for ClearOne

An interpretation of CLRO's beta

ClearOne has a beta of 1.33, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, CLRO can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

NasdaqCM:CLRO Income Statement Sep 27th 17
NasdaqCM:CLRO Income Statement Sep 27th 17

Does CLRO's size and industry impact the expected beta?

With a market cap of USD $66.70M, CLRO falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, CLRO’s industry, communications equipment, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of CLRO’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Can CLRO's asset-composition point to a higher beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine CLRO’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, CLRO seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect CLRO 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. However, this is the opposite to what CLRO’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

Are you a shareholder? You may reap the gains of CLRO's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into CLRO.

Are you a potential investor? I recommend that you look into CLRO's fundamental factors such as its current valuation and financial health. 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. CLRO may be a great investment during times of economic growth.

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 ClearOne 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 ClearOne 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.

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