If you are a shareholder in MoSys Inc’s (NASDAQ:MOSY), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as MOSY. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock's market risk is beta, 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 MOSY's beta
MoSys's beta of 0.49 indicates that the stock value will be less variable compared to the whole stock market.This means that the change in MOSY'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.MOSY'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.
How does MOSY's size and industry impact its risk?
A market capitalisation of USD $7.44M puts MOSY in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, MOSY also operates in the semiconductors and semiconductor equipment industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap MOSY but a low beta for the semiconductors and semiconductor equipment industry. It seems as though there is an inconsistency in risks portrayed by MOSY’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 MOSY's asset-composition point to a higher 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 examine MOSY’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 account for less than a third of the company's overall assets, MOSY seems to have a smaller dependency on fixed costs to generate revenue.Thus, we can expect MOSY 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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto MOSY. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into MOSY.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 MoSys 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 MoSys 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.