What Kind Of Risk And Return Should You Expect For John Wood Group PLC (LSE:WG)?
If you are a shareholder in John Wood Group PLC’s (LSE:WG.), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. WG. 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 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.
View our latest analysis for John Wood Group
An interpretation of WG.'s beta
With a five-year beta of 0.29, John Wood Group appears to be a less volatile company compared to the rest of the market. 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. WG.’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.
Could WG.'s size and industry cause it to be more volatile?
WG. has a market capitalization of GBP £2.55B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. Conversely, the company operates in the energy equipment and services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors can expect a low beta associated with the size of WG., but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests WG. should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is WG.'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 WG.’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since WG.’s fixed assets are only 4.32% 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, WG.’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 WG.. 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 WG..
Are you a potential investor? Before you buy WG., you should look at the stock in conjunction with their current portfolio holdings. WG. 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 John Wood Group 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 John Wood Group 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.
