For The Colonial Motor Company Limited’s (NZSE:CMO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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. Not every stock is exposed to the same level 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.
View our latest analysis for Colonial Motor
An interpretation of CMO's beta
With a five-year beta of 0.44, Colonial Motor 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. CMO’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.
Could CMO's size and industry cause it to be more volatile?
A market capitalisation of NZD $259.92M puts CMO in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, CMO’s industry, specialty retail, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap CMO but a low beta for the specialty retail industry. This is an interesting conclusion, since both CMO’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How CMO'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 CMO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, CMO appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of CMO indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts CMO’s current beta value which indicates a below-average volatility.