If you are looking to invest in Paramount Group Inc’s (NYSE:PGRE), 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. The beta measures PGRE’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.
What does PGRE’s beta value mean?
With a five-year beta of 0.68, Paramount Group appears to be a less volatile company compared to the rest of the market. This means that the change in PGRE’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. PGRE’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.
How does PGRE’s size and industry impact its risk?
A market capitalisation of US$4.03B puts PGRE in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. However, PGRE operates in the reits industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of PGRE but a higher beta for the reits industry. This is an interesting conclusion, since its industry suggests PGRE should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is PGRE’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 test PGRE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. PGRE’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of PGRE indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what PGRE’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PGRE. 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. Depending on the composition of your portfolio, PGRE may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Paramount Group’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PGRE’s future growth? Take a look at our free research report of analyst consensus for PGRE’s outlook.
- Past Track Record: Has PGRE 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 PGRE’s historicals for more clarity.
- 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.