By Bruce Howe
If you are looking to invest in Nova Lifestyle Inc’s (NASDAQ:NVFY), 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. The beta measures NVFY’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole 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.
View our latest analysis for Nova Lifestyle
An interpretation of NVFY’s beta
Nova Lifestyle’s five-year beta of 1.19 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, NVFY can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does NVFY’s size and industry impact the expected beta?
With a market cap of USD $45.38M, NVFY falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, NVFY’s industry, household durables, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of NVFY’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can NVFY’s asset-composition point to a higher 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 examine NVFY’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, NVFY seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect NVFY 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 outcome contradicts NVFY’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of NVFY’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into NVFY.
Are you a potential investor? I recommend that you look into NVFY’s fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. NVFY may be a great investment during times of economic growth.
