Can General Communication Inc (GNCMA) Improve Your Portfolio Returns?
If you are a shareholder in General Communication Inc’s (NASDAQ:GNCM.A), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of GNCM.A. 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 second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Different characteristics of a stock expose it to various levels 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. 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 GNCM.A
What does GNCM.A's beta value mean?
With a five-year beta of 0.76, General Communication appears to be a less volatile company compared to the rest of the market. 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. GNCM.A'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 GNCM.A's size and industry cause it to be more volatile?
With a market cap of USD $1.47B, GNCM.A falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the telecommunication services industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of GNCM.A, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from GNCM.A’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can GNCM.A'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 GNCM.A’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, GNCM.A seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect GNCM.A 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 GNCM.A’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? GNCM.A 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 GNCM.A is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, GNCM.A may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in GNCM.A, as well as where we are in the current economic cycle.
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 General Communication 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 General Communication 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.
