If you are looking to invest in Hupsteel Limited’s (SGX:BMH), 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. The beta measures BMH’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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An interpretation of BMH’s beta
With a beta of 1.19, Hupsteel is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, BMH can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does BMH’s size and industry impact the expected beta?
BMH, with its market capitalisation of SGD SGD109.23M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the trade distributors industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with BMH’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can BMH’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 test BMH’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since BMH’s fixed assets are only 25.80% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect BMH 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 outcome contradicts BMH’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of BMH’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into BMH. For next steps, take a look at BMH’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.