For Petrel Resources Plc’s (AIM:PET) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures PET’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed 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.
What does PET’s beta value mean?
With a five-year beta of 0.95, Petrel Resources appears to be a less volatile company compared to the rest of the market. This means that the change in PET’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. Based on this beta value, PET appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could PET’s size and industry cause it to be more volatile?
A market capitalisation of GBP £3.19M puts PET in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, PET’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas 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 PET’s size and industry relative to its actual beta value.
Is PET’s cost structure indicative of a high 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 examine PET’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 PET’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect PET 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, PET’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto PET. 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, PET may be a valuable stock to hold onto in order to cushion the impact of a downturn. For more company-specific research on PET, check out our our free analysis plaform here.
Are you a potential investor? Depending on the composition of your portfolio, PET 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 PET, as well as where we are in the current economic cycle. You can examine these factors in our free fundamental research report for PET 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.