For SandRidge Mississippian Trust I’s (NYSE:SDT) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. SDT 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 every stock is exposed 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.
An interpretation of SDT’s beta
With a five-year beta of 0.74, SandRidge Mississippian Trust I appears to be a less volatile company compared to the rest of the market. This means that the change in SDT’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. SDT’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 SDT’s size and industry cause it to be more volatile?
SDT, with its market capitalisation of US$22.64M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, SDT also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap SDT but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by SDT’s size and industry relative to its actual beta value.
Can SDT’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 SDT’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 is virtually non-existent in SDT’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect SDT 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:
SDT 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 SDT is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as SandRidge Mississippian Trust I’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is SDT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has SDT 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 SDT’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.