Giga-tronics Incorporated (GIGA): Risks You Need To Consider Before Buying
If you are a shareholder in Giga-tronics Incorporated’s (NASDAQ:GIGA), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures GIGA’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
Check out our latest analysis for Giga-tronics
What does GIGA's beta value mean?
Giga-tronics’s beta of 0.51 indicates that the company is less volatile relative to the diversified market portfolio. 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. GIGA'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 GIGA's size and industry cause it to be more volatile?
A market capitalisation of USD $8.62M puts GIGA in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, GIGA also operates in the electronic equipment, instruments and components 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 electronic equipment, instruments and components industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both GIGA’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How GIGA's assets could affect its 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 test GIGA’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%, GIGA 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 GIGA 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 GIGA’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto GIGA. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, GIGA may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Depending on the composition of your portfolio, GIGA 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 GIGA, 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 Giga-tronics 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 Giga-tronics 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.
