If you are looking to invest in China Jo-Jo Drugstores Inc’s (NASDAQ:CJJD), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose 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 does CJJD's beta value mean?
With a five-year beta of 0.25, China Jo-Jo Drugstores 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. CJJD’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 CJJD's size and industry cause it to be more volatile?
A market capitalisation of USD $41.10M puts CJJD in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the food and staples retailing industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap CJJD but a low beta for the food and staples retailing industry. It seems as though there is an inconsistency in risks from CJJD’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can CJJD'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 CJJD’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, CJJD seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect CJJD 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, CJJD’s beta value conveys the same message.
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 CJJD. 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? Before you buy CJJD, you should look at the stock in conjunction with their current portfolio holdings. CJJD 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 China Jo-Jo Drugstores 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 China Jo-Jo Drugstores 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.