What You Must Know About NetScout Systems Inc’s (NTCT) Risks
If you are a shareholder in NetScout Systems Inc’s (NASDAQ:NTCT), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. NTCT 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.
Check out our latest analysis for NetScout Systems
An interpretation of NTCT's beta
NetScout Systems’s five-year beta of 1.62 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. Based on this beta value, NTCT 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 NTCT's size and industry cause it to be more volatile?
NTCT has a market capitalization of USD $2.90B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. However, NTCT operates in the communications equipment industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of NTCT, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests NTCT should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How NTCT'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 NTCT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since NTCT’s fixed assets are only 2.97% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect NTCT 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. However, this is the opposite to what NTCT’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of NTCT'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 NTCT.
Are you a potential investor? I recommend that you look into NTCT's fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. NTCT may be a great investment during times of economic growth.
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 NetScout Systems 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 NetScout Systems 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.
