If you are looking to invest in EXCO Resources Inc’s (NYSE:XCO), 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. XCO 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 all stocks are expose 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
What does XCO’s beta value mean?
With a five-year beta of 0.63, EXCO Resources appears to be a less volatile company compared to the rest of the market. This means that the change in XCO’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. XCO’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 XCO’s size and industry cause it to be more volatile?
XCO, with its market capitalisation of USD $13.11M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, XCO also operates in the oil, gas and consumable fuels industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil, gas and consumable fuels industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by XCO’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How XCO’s assets could affect its 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 XCO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. XCO’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect XCO to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts XCO’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? XCO 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 XCO is valuable to lower your risk of market exposure, in particular, during times of economic decline. For next steps, take a look at XCO’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.
Are you a potential investor? Before you buy XCO, you should look at the stock in conjunction with their current portfolio holdings. XCO may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment. You can examine these factors in our free fundamental research report for XCO 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.