Mulberry Group plc (AIM:MUL): How Does It Impact Your Portfolio?
If you are a shareholder in Mulberry Group plc’s (AIM:MUL), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures MUL’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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 MUL
What does MUL's beta value mean?
Mulberry Group's beta of 0.02 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. MUL'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 MUL's size and industry impact its risk?
With a market cap of GBP £642.68M, MUL falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, MUL’s industry, textiles, apparel and luxury goods, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the textiles, apparel and luxury goods industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by MUL’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How MUL's assets could affect its 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 examine MUL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, MUL appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect MUL to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. However, this is the opposite to what MUL’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? MUL 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 MUL is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Before you buy MUL, you should look at the stock in conjunction with their current portfolio holdings. MUL 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 Mulberry 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 Mulberry 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.
