Ubisense Group Plc (AIM:UBI): How Does It Impact Your Portfolio?
If you are a shareholder in Ubisense Group Plc’s (AIM:UBI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. UBI 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 market as a whole represents a beta 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.
Check out our latest analysis for Ubisense Group
What does UBI's beta value mean?
Ubisense Group’s beta of 0.4 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. UBI’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 UBI's size and industry cause it to be more volatile?
UBI, with its market capitalisation of GBP £19.56M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the it services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the it services 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 UBI’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.
Is UBI's cost structure indicative of a high 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 UBI’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, UBI seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect UBI 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 UBI. 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 UBI.
Are you a potential investor? Before you buy UBI, you should look at the stock in conjunction with their current portfolio holdings. UBI may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping 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 Ubisense 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 Ubisense 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.
