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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

High-Beta, Low-Risk Stocks

Some examples to demonstrate that volatility is far from synonymous with risk

"The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period...

We think of business risk in terms of what can happen — say five, 10, 15 years from now — that will destroy, or modify, or reduce the economic strengths that we perceive currently exist in a business...

Risk comes from not knowing what you're doing.”

- Warren Buffett (Trades, Portfolio)

To us, it seems a shame that volatility is widely employed to gauge the risk of an investment in the financial world (and in business schools as well). Some related metrics include beta, market correlation and sharp ratio (to measure risk-adjusted return).

As the Oracle of Omaha described above, volatility is far from synonymous with risk for equity investors. Instead, it is more relevent for speculators or gamblers. Investors, on the other hand, should regard downside risks as the likelihood of permanent impairment of their capital. We think that such impairment often derives from unsound business fundamentals, including low-quality management, lack of sustainability in competitive advantage, over-leverage or inferior market position, as well as some external factors, such as a rapidly-moving industry, economic downturn, industry headwinds or intensifying competition.

At Urbem, we take every attempt to mitigate risk exposures across our holdings by focusing on predictable, easy-to-understand, market-leading, well-managed and moaty businesses. While we pay zero attention to the beta when it comes to stock picking, the heightened volatility itself can present more significant buying opportunities per our experiences. Below are a couple of examples of these high-beta, low-risk companies.

Manhattan Associates

Georgia-based Manhattan Associates is a market leader of supply chain and omnichannel technology. The business has been benefiting from the trend that our shopping experience becomes increasingly digitalized, and it has become the go-to technology provider for many of the world’s premier names, including Adidas (XTER:ADS) and Urban Outfitters (NASDAQ:URBN).

For more than a decade, Manhattan Associates has steadily improved its return on assets and free cash flow, although its share has been highly volatile with a beta of 1.82. In light of the deeply integrated services throughout the mission-critical operations, we doubt that the company’s leading position would be shakable.

SEI Investments

Pennsylvania-based SEI Investments (NASDAQ:SEIC) is a global provider of investment processing, investment management and investment operations solutions that enables corporations, financial institutions, financial advisors and ultra-high-net-worth investors to create and manage wealth. Today, the 4,000-employee company is still managed and chaired by its founder, Alfred West.

The stock has a beta of 1.36, but the business consistently delivered an outperforming margin and return on capital thanks to the high switching cost of its platforms. SEI Investments managed to earn a double-digit return on assets even during the Global Financial Crisis.

We expect headwinds (e.g. passive investing) and tailwinds (e.g. tighter regulation) to co-exist alongside the company’s business growth, but so far, it appears that the latter has prevailed.

Both Manhattan Associates and SEI Investments have a low debt ratio and plenty of liquidity on their balance sheet.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Berkshire Hathaway and SEI Investments.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website


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