If you are a shareholder in Winmark Corporation’s (NASDAQ:WINA), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures WINA’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels 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.
What does WINA's beta value mean?
With a five-year beta of 0.45, Winmark 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. WINA’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.
How does WINA's size and industry impact its risk?
A market capitalisation of USD $573.94M puts WINA in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, WINA also operates in the specialty retail industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the specialty retail industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both WINA’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is WINA'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 test WINA’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, WINA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect WINA 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. Similarly, WINA’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto WINA. 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 WINA.
Are you a potential investor? Before you buy WINA, you should look at the stock in conjunction with their current portfolio holdings. WINA 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 Winmark 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 Winmark 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.