For Retractable Technologies Inc’s (AMEX:RVP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. RVP 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. Not all stocks are expose to the same level of market risk, and the broad market index 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 is RVP’s market risk?
Retractable Technologies's beta of 0.5 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in RVP'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, RVP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could RVP's size and industry cause it to be more volatile?
A market capitalisation of USD $21.11M puts RVP in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, RVP operates in the healthcare equipment and supplies industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap RVP but a low beta for the healthcare equipment and supplies industry. This is an interesting conclusion, since its size suggests RVP 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 RVP'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 test RVP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. RVP'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 RVP indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts RVP’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto RVP. 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, RVP may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy RVP, you should look at the stock in conjunction with their current portfolio holdings. RVP 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 Retractable Technologies 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 Retractable Technologies 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.