If you are looking to invest in Oxbridge Re Holdings Limited’s (NASDAQ:OXBR), 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. 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 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.
An interpretation of OXBR’s beta
Oxbridge Re Holdings’s beta of 0.02 indicates that the company is less volatile relative to the diversified market portfolio. 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. Based on this beta value, OXBR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could OXBR’s size and industry cause it to be more volatile?
OXBR, with its market capitalisation of US$11.75M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, OXBR also operates in the insurance industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the insurance 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 OXBR’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.
How OXBR’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 test OXBR’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 is virtually non-existent in OXBR’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect OXBR 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. Similarly, OXBR’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto OXBR. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Oxbridge Re Holdings’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is OXBR’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.
- 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.