If you are a shareholder in Avalon Holdings Corporation’s (AMEX:AWX), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. AWX 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
What is AWX’s market risk?
With a five-year beta of 0.15, Avalon Holdings appears to be a less volatile company compared to the rest of the market. 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, AWX appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does AWX’s size and industry impact the expected beta?
AWX, with its market capitalisation of US$8.22M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AWX also operates in the commercial services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap AWX but a low beta for the commercial services industry. This is an interesting conclusion, since both AWX’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can AWX’s asset-composition point to a higher 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 AWX’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, AWX appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of AWX indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what AWX’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
AWX 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 AWX is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether AWX is a good investment for you, we also need to consider important company-specific fundamentals such as Avalon Holdings’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is AWX’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 AWX 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 AWX’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.