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If you are a shareholder in Investors Real Estate Trust’s (NYSE:IRET), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as IRET. 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 second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, 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.
See our latest analysis for Investors Real Estate Trust
What does IRET’s beta value mean?
Investors Real Estate Trust’s beta of 0.86 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, IRET appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market. NYSE:IRET Income Statement Jan 13th 18
Could IRET’s size and industry cause it to be more volatile?
A market capitalisation of $763.49M puts IRET in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, IRET’s industry, reits, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap IRET but a low beta for the reits industry. This is an interesting conclusion, since both IRET’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.
Can IRET’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 test IRET’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. IRET’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of IRET indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what IRET’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto IRET. 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. Depending on the composition of your portfolio, IRET may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Investors Real Estate Trust’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Discounted cash flow calculation for every stock
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