If you are looking to invest in ADDvantage Technologies Group Inc’s (NASDAQ:AEY), 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. Generally, an investor should consider two types of risk that impact the market value of AEY. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels of market risk. A popular measure of market risk for a stock is its beta, 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.
What is AEY’s market risk?
With a five-year beta of 0.71, ADDvantage Technologies Group appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. AEY’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 AEY's size and industry cause it to be more volatile?
With a market cap of USD $14.47M, AEY falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, AEY’s industry, technology hardware and equipment, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap AEY but a low beta for the technology hardware and equipment industry. It seems as though there is an inconsistency in risks portrayed by AEY’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is AEY's cost structure indicative of a high 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 AEY’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%, AEY 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 AEY 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 AEY’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? AEY 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 AEY is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, AEY may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in AEY, as well as where we are in the current economic cycle.
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 ADDvantage Technologies 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 ADDvantage Technologies 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.