If you are looking to invest in RAVE Restaurant Group Inc’s (NASDAQ:RAVE), 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. RAVE is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels 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.
What does RAVE's beta value mean?
With a five-year beta of 0.33, RAVE Restaurant Group appears to be a less volatile company compared to the rest of the market. 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. RAVE's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could RAVE's size and industry cause it to be more volatile?
With a market cap of USD $24.28M, RAVE falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, RAVE’s industry, hotels, restaurants and leisure, 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 hotels, restaurants and leisure 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 RAVE’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.
Can RAVE's asset-composition point to a higher 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 RAVE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, RAVE appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect RAVE 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. This outcome contradicts RAVE’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? RAVE may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as RAVE is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Before you buy RAVE, you should look at the stock in conjunction with their current portfolio holdings. RAVE may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on RAVE Restaurant Group for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in RAVE Restaurant Group anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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.