All You Need To Know About PipeHawk plc’s (LON:PIP) Risks
For PipeHawk plc’s (AIM:PIP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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 market as a whole represents a beta 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.
See our latest analysis for PipeHawk
What does PIP’s beta value mean?
With a beta of 1.1, PipeHawk is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, PIP may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could PIP’s size and industry cause it to be more volatile?
PIP, with its market capitalisation of UK£1.07M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, PIP also operates in the electronic industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of PIP’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can PIP’s asset-composition point to a higher 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 test PIP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since PIP’s fixed assets are only 12.11% 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. This outcome contradicts PIP’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of PIP’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into PIP. In order to fully understand whether PIP is a good investment for you, we also need to consider important company-specific fundamentals such as PipeHawk’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
1. Financial Health: Is PIP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has PIP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PIP’s historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.
