eGain Corporation (EGAN): How Does It Impact Your Portfolio?
For eGain Corporation’s (NASDAQ:EGAN) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as EGAN. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as EGAN, because it is rare that an entire industry collapses at once. 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. A popular measure of market risk for a stock is its beta, and the market as a whole 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.
See our latest analysis for EGAN
An interpretation of EGAN's beta
eGain's beta of 0.46 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in EGAN'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. EGAN’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does EGAN's size and industry impact its risk?
A market capitalisation of USD $66.41M puts EGAN in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the software and services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the software and services 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 EGAN’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.
How EGAN'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 test EGAN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, EGAN doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect EGAN 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. Similarly, EGAN’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto EGAN. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into EGAN.
Are you a potential investor? Before you buy EGAN, you should look at the stock in conjunction with their current portfolio holdings. EGAN may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
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 eGain 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 eGain 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.
