For Loral Space & Communications Inc’s (NASDAQ:LORL) 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 every stock is exposed to the same level of market risk, and the market as a whole represents a beta value 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.
An interpretation of LORL’s beta
Loralce & Communications’s five-year beta of 1.23 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, LORL 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 LORL’s size and industry cause it to be more volatile?
With a market cap of US$1.37B, LORL falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the media industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of LORL, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests LORL should be less volatile than it actually is.
Is LORL’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 LORL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in LORL’s operations, it has low 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. This outcome contradicts LORL’s current beta value which indicates an above-average volatility.
What this means for you:
You could reap the gains of LORL’s returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as LORL is valuable to pump up your returns, in particular, during times of economic growth. In order to fully understand whether LORL is a good investment for you, we also need to consider important company-specific fundamentals such as Loralce & Communications’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 LORL’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 LORL 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 LORL’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.