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For Hennessy Advisors Inc’s (NASDAQ:HNNA) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. HNNA 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.
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An interpretation of HNNA’s beta
Hennessy Advisors’s beta of 0.71 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. HNNA’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could HNNA’s size and industry cause it to be more volatile?
A market capitalisation of US$153.30M puts HNNA in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, HNNA’s industry, capital markets, 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 capital markets industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by HNNA’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How HNNA’s assets could affect its 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 HNNA’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 an insignificant portion of total assets, HNNA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect HNNA 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, HNNA’s beta value conveys the same message.