For Taitron Components Incorporated’s (NASDAQ:TAIT) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. TAIT 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
An interpretation of TAIT's beta
Taitron Components’s beta of 0.17 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. Based on this beta value, TAIT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does TAIT's size and industry impact its risk?
A market capitalisation of USD $8.97M puts TAIT in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, TAIT also operates in the electronic equipment, instruments and components industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap TAIT but a low beta for the electronic equipment, instruments and components industry. It seems as though there is an inconsistency in risks portrayed by TAIT’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How TAIT's assets could affect its 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 TAIT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. TAIT'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 TAIT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts TAIT’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 TAIT. 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, TAIT 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 TAIT, you should look at the stock in conjunction with their current portfolio holdings. TAIT 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 Taitron Components 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 Taitron Components 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.