If you are a shareholder in Rosetta Stone Inc’s (NYSE:RST), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. RST is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed to the same level 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.
What is RST’s market risk?
Rosetta Stone’s beta of 0.8 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. RST’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.
Does RST's size and industry impact the expected beta?
With a market cap of USD $234.22M, RST falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, RST also operates in the software industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap RST but a low beta for the software industry. It seems as though there is an inconsistency in risks portrayed by RST’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.
Is RST'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 RST’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since RST’s fixed assets are only 18.18% 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, RST’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 RST. 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 RST.
Are you a potential investor? Before you buy RST, you should look at the stock in conjunction with their current portfolio holdings. RST 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 Rosetta Stone 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 Rosetta Stone 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.