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If you are looking to invest in Land & Homes Group Limited’s (ASX:LHM), 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 LHM’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 broad market index represents a beta value 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.
Check out our latest analysis for Land & Homes Group
An interpretation of LHM’s beta
Land & Homes Group has a beta of 2.29, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, LHM 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 LHM’s size and industry impact the expected beta?
With a market cap of AU$25.19M, LHM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, LHM’s industry, real estate, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with LHM’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can LHM’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 LHM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, LHM 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 LHM indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, LHM’s beta value conveys the same message.