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For Steel Partners Holdings LP.’s (NYSE:SPLP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. SPLP 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 market as a whole 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.
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An interpretation of SPLP’s beta
Steel Partners Holdings’s beta of 0.85 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in SPLP’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. SPLP’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.
Does SPLP’s size and industry impact the expected beta?
SPLP, with its market capitalisation of US$460.19M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the diversified financial 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 diversified financial industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both SPLP’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.
Is SPLP’s cost structure indicative of a high 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 SPLP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, SPLP doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect SPLP 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.