If you are looking to invest in CPS Technologies Corporation’s (NASDAQ:CPSH), 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. CPSH 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 every stock is exposed 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

View our latest analysis for CPS Technologies

What is CPSH’s market risk?

CPS Technologies’s beta of 0.16 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. CPSH'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 CPSH's size and industry cause it to be more volatile?

A market capitalisation of USD $14.92M puts CPSH in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the electronic equipment, instruments and components 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 CPSH but a low beta for the electronic equipment, instruments and components industry. This is an interesting conclusion, since both CPSH’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 CPSH'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 CPSH’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since CPSH’s fixed assets are only 29.93% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. 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 CPSH. 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 CPSH.

Are you a potential investor? Before you buy CPSH, you should look at the stock in conjunction with their current portfolio holdings. CPSH may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.

Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on CPS Technologies for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in CPS Technologies anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.