Houghton Mifflin Harcourt Company (HMHC): How Does It Impact Your Portfolio?
If you are looking to invest in Houghton Mifflin Harcourt Company’s (NASDAQ:HMHC), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures HMHC’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta value 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.
Check out our latest analysis for Houghton Mifflin Harcourt
What is HMHC’s market risk?
Houghton Mifflin Harcourt’s beta of 0.69 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. HMHC’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 HMHC's size and industry impact its risk?
HMHC, with its market capitalisation of USD $1.47B, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, HMHC also operates in the diversified consumer services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap HMHC but a low beta for the diversified consumer services industry. It seems as though there is an inconsistency in risks portrayed by HMHC’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can HMHC'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 HMHC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, HMHC seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect HMHC 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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto HMHC. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
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.
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 Houghton Mifflin Harcourt 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 Houghton Mifflin Harcourt 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.
