If you are a shareholder in Love Group Global Ltd’s (ASX:LVE), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures LVE’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. 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.
See our latest analysis for LVE
What does LVE's beta value mean?
Love Group Global's beta of 0.05 indicates that the stock value will be less variable compared to the whole stock market. 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. LVE’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.
Does LVE's size and industry impact the expected beta?
A market capitalisation of AUD $6.67M puts LVE in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the software industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap LVE but a low beta for the software industry. This is an interesting conclusion, since both LVE’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How LVE's assets could affect its 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 LVE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since LVE’s fixed assets are only 0.94% 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 LVE 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto LVE. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into LVE.