For Stratus Properties Inc’s (NASDAQ:STRS) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. STRS 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. Different characteristics of a stock expose it to various levels 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.
An interpretation of STRS's beta
Stratus Properties's beta of 0.7 indicates that the stock value will be less variable compared to the whole stock 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. STRS'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.
How does STRS's size and industry impact its risk?
STRS, with its market capitalisation of USD $246.23M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the real estate management and development 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 STRS but a low beta for the real estate management and development industry. This is an interesting conclusion, since both STRS’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 STRS's assets could affect its 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 STRS’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, STRS seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of STRS indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what STRS’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? STRS may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as STRS is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Before you buy STRS, you should look at the stock in conjunction with their current portfolio holdings. STRS may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping 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 Stratus Properties 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 Stratus Properties 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.