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For Abaco Capital plc’s (AIM:ABA) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. ABA 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 all stocks are expose 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
View our latest analysis for Abaco Capital
An interpretation of ABA’s beta
Abaco Capital’s beta of 0.21 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in ABA’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. Based on this beta value, ABA appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does ABA’s size and industry impact its risk?
A market capitalisation of UK£17.48M puts ABA in the category of small-cap stocks, which tends to possess higher beta than larger companies. But, ABA’s industry, pharmaceuticals, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of ABA, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests ABA should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can ABA’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 examine ABA’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 ABA’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.