If you are looking to invest in Vimy Resources Limited’s (ASX:VMY), 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. Generally, an investor should consider two types of risk that impact the market value of VMY. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as VMY, because it is rare that an entire industry collapses at once. 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.
Different characteristics of a stock expose it to various levels 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. 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 Vimy Resources
What is VMY’s market risk?
Vimy Resources’s beta of 0.21 indicates that the stock value will be less variable compared to the whole stock market.This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change.Based on this beta value, VMY appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does VMY’s size and industry impact the expected beta?
VMY, with its market capitalisation of AUD $44.99M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, VMY also operates in the energy 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 energy industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by VMY’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is VMY’s cost structure indicative of a high 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 VMY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint.Considering fixed assets account for less than a third of the company’s overall assets, VMY seems to have a smaller dependency on fixed costs to generate revenue.Thus, we can expect VMY 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto VMY. 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 VMY.
Are you a potential investor? Before you buy VMY, you should look at the stock in conjunction with their current portfolio holdings. VMY may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
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 Vimy Resources 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 Vimy Resources anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.