If you are a shareholder in NQ Mobile Inc’s (NYSE:NQ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as NQ. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as NQ, because it is rare that an entire industry collapses at once. 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.
Different characteristics of a stock expose it to various levels of market risk. A widely-used metric to measure a stock’s market risk is beta, 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.
See our latest analysis for NQ
What is NQ’s market risk?
NQ Mobile’s five-year beta of 1.54 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,NQ may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does NQ’s size and industry impact the expected beta?
A market capitalisation of USD $362.23M puts NQ in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, NQ’s industry, software and services, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of NQ’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can NQ’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 NQ’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 less than a third of the company’s total assets, NQ doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.Thus, we can expect NQ 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. However, this is the opposite to what NQ’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto NQ. 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 NQ.
Are you a potential investor? Before you buy NQ, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. NQ may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 NQ Mobile 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 NQ Mobile anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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