For Southwestern Energy Company’s (NYSE:SWN) 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. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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.
An interpretation of SWN’s beta
With a beta of 1.26, Southwestern Energy is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, SWN 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.
Could SWN’s size and industry cause it to be more volatile?
With a market capitalisation of USD $2.76B, SWN is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. But, SWN’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 low beta for the large-cap nature of SWN but a higher beta for the oil and gas industry. This is an interesting conclusion, since its size suggests SWN should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is SWN’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 SWN’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. SWN’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. As a result, this aspect of SWN indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, SWN’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You may reap the gains of SWN’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. For more company-specific research on SWN, check out our our free analysis plaform here.
Are you a potential investor? Before you buy SWN, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on SWN. You can examine these factors in our free fundamental research report for SWN 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.