Why You Need To Look At This Factor Before Buying ECA Marcellus Trust I (NYSE:ECT)
If you are looking to invest in ECA Marcellus Trust I’s (NYSE:ECT), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This 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.
Check out our latest analysis for ECA Marcellus Trust I
What is ECT’s market risk?
ECA Marcellus Trust I’s five-year beta of 1.23 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, ECT will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Does ECT’s size and industry impact the expected beta?
With a market cap of US$38.73M, ECT falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, ECT’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. This is consistent with ECT’s individual beta value we discussed above.
Can ECT’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 ECT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, ECT doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ECT 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. However, this is the opposite to what ECT’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could reap the gains of ECT’s returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as ECT is valuable to pump up your returns, in particular, during times of economic growth. What I have not mentioned in my article here are important company-specific fundamentals such as ECA Marcellus Trust I’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Financial Health: Is ECT’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.
2. Past Track Record: Has ECT 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 ECT’s historicals for more clarity.
3. 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.
