What Are The Drivers Of Leading Brands Inc’s (NASDAQ:LBIX) Risks?
For Leading Brands Inc’s (NASDAQ:LBIX) 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. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
Check out our latest analysis for Leading Brands
What does LBIX’s beta value mean?
Leading Brands has a beta of 1.68, 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. Based on this beta value, LBIX will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does LBIX’s size and industry impact its risk?
LBIX, with its market capitalisation of US$3.39M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the beverage industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap LBIX but a low beta for the beverage industry. This is an interesting conclusion, since its industry suggests LBIX should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can LBIX’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 test LBIX’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, LBIX seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect LBIX 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 outcome contradicts LBIX’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of LBIX’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 LBIX. What I have not mentioned in my article here are important company-specific fundamentals such as Leading Brands’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 LBIX’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 LBIX 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 LBIX’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.
