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If you are a shareholder in Odyssey Energy Limited’s (ASX:ODY), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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 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 ODY’s beta
Odyssey Energy’s beta of 0.16 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in ODY’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. ODY’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.
How does ODY’s size and industry impact its risk?
A market capitalisation of AU$21.62M puts ODY in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the oil and gas industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas 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 ODY’s size and industry relative to its actual beta value.
Can ODY’s asset-composition point to a higher 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 examine ODY’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, ODY doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ODY 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, ODY’s beta value conveys the same message.