For Collectors Universe Inc’s (NASDAQ:CLCT) 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 CLCT. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not every stock is exposed to the same level 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.
An interpretation of CLCT's beta
Collectors Universe’s beta of 0.99 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. CLCT's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could CLCT's size and industry cause it to be more volatile?
CLCT, with its market capitalisation of USD $210.00M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the consumer services 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 CLCT but a low beta for the consumer services industry. It seems as though there is an inconsistency in risks portrayed by CLCT’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is CLCT'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 CLCT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since CLCT’s fixed assets are only 20.57% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect CLCT 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:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto CLCT. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
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 Collectors Universe 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 Collectors Universe 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.