If you are looking to invest in Parallel Media Group plc’s (AIM:PAA), 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. Broadly speaking, there are two types of risk you should consider when investing in stocks such as PAA. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta 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.
What is PAA’s market risk?
Parallel Media Group’s beta of 0.75 indicates that the stock value will be less variable compared to the whole stock market.This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change.Based on this beta value, PAA appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does PAA’s size and industry impact its risk?
With a market cap of GBP £699.65K, PAA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the media industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap PAA but a low beta for the X industry. This is an interesting conclusion, since its size suggests PAA should be more volatile than it actually is.
How PAA’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 examine PAA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.Since PAA’s fixed assets are only X% 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. Similarly, PAA’s beta value conveys the same message.
What this means for you:
Are you a shareholder? PAA may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as PAA is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, PAA may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in PAA, as well as where we are in the current economic cycle.
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 Parallel Media Group 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 Parallel Media Group anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.