If you are a shareholder in OptimumBank Holdings Inc’s (NASDAQ:OPHC), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as OPHC. 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 type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Not every stock is exposed to the same level 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. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
An interpretation of OPHC's beta
OptimumBank Holdings's beta of 0.3 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in OPHC'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. OPHC’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 OPHC's size and industry impact its risk?
OPHC, with its market capitalisation of USD $2.60M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the banks industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap OPHC but a low beta for the banks industry. This is an interesting conclusion, since both OPHC’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 OPHC'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 OPHC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since OPHC’s fixed assets are only 4.45% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, OPHC’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 OPHC. 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 OPHC.
Are you a potential investor? Before you buy OPHC, you should look at the stock in conjunction with their current portfolio holdings. OPHC 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 OptimumBank Holdings 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 OptimumBank Holdings 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.