Yahoo Finance Diversified Restaurant Holdings Inc (NASDAQ:SAUC): Risks You Need To Consider Before Buying
For Diversified Restaurant Holdings Inc’s (NASDAQ:SAUC) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. SAUC 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 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.
Check out our latest analysis for Diversified Restaurant Holdings
An interpretation of SAUC’s beta
With a beta of 1.19, Diversified Restaurant Holdings is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, SAUC 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.
Could SAUC’s size and industry cause it to be more volatile?
A market capitalisation of US$33.11M puts SAUC in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, SAUC also operates in the hospitality industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the hospitality industry, relative to those more well-established firms in a more defensive industry. This is consistent with SAUC’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can SAUC’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 SAUC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, SAUC appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect SAUC to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, SAUC’s beta value conveys the same message.
What this means for you:
You could benefit from higher returns from SAUC during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. What I have not mentioned in my article here are important company-specific fundamentals such as Diversified Restaurant Holdings’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SAUC’s future growth? Take a look at our free research report of analyst consensus for SAUC’s outlook.
Past Track Record: Has SAUC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SAUC’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
