If you are a shareholder in Wilhelmina International Inc’s (NASDAQ:WHLM), 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 WHLM’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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
What is WHLM’s market risk?
Wilhelmina International’s beta of 0.64 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in WHLM’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. WHLM’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 WHLM’s size and industry cause it to be more volatile?
WHLM, with its market capitalisation of USD $35.25M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the commercial services and supplies 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 commercial services and supplies industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both WHLM’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is WHLM’s cost structure indicative of a high 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 WHLM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since WHLM’s fixed assets are only 7.17% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect WHLM 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, WHLM’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 WHLM. 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 WHLM. For next steps, take a look at WHLM’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail. You can examine these factors in our free fundamental research report for WHLM here.
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.