If you are looking to invest in Potbelly Corporation’s (NASDAQ:PBPB), 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. 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 PBPB’s beta
Potbelly’s beta of 0.74 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. PBPB’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 PBPB’s size and industry cause it to be more volatile?
A market capitalisation of US$310.07M puts PBPB in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the hospitality industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap PBPB but a low beta for the hospitality industry. This is an interesting conclusion, since both PBPB’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is PBPB’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 PBPB’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. PBPB’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. Thus, we can expect PBPB 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 PBPB’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 PBPB. 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, PBPB may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether PBPB is a good investment for you, we also need to consider important company-specific fundamentals such as Potbelly’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PBPB’s future growth? Take a look at our free research report of analyst consensus for PBPB’s outlook.
- Past Track Record: Has PBPB 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 PBPB’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.