Can Lianluo Smart Limited (NASDAQ:LLIT) Improve Your Portfolio Returns?
If you are looking to invest in Lianluo Smart Limited’s (NASDAQ:LLIT), 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. LLIT 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 all stocks are expose 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.
See our latest analysis for Lianluo Smart
What does LLIT’s beta value mean?
Lianluo Smart’s five-year beta of 2.04 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, LLIT will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could LLIT’s size and industry cause it to be more volatile?
With a market cap of USD $20.78M, LLIT falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, LLIT operates in the medical equipment industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of LLIT, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from LLIT’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is LLIT’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 LLIT’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, LLIT seems to have a smaller dependency on fixed costs to generate revenue. 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. However, this is the opposite to what LLIT’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You may reap the gains of LLIT’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 LLIT. In order to fully understand whether LLIT is a good investment for you, we also need to consider important company-specific fundamentals such as Lianluo Smart’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 LLIT’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 LLIT 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 LLIT’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.
