If you are a shareholder in American CuMo Mining Corporation’s (TSXV:MLY), 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 MLY. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. 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.
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. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.See our latest analysis for American CuMo Mining
An interpretation of MLY’s beta
American CuMo Mining’s beta of 0.86 indicates that the stock value will be less variable compared to the whole stock market. 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, MLY appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could MLY’s size and industry cause it to be more volatile?
A market capitalisation of CA$14.14M puts MLY in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, MLY’s industry, metals and mining, 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 MLY but a low beta for the metals and mining industry. This is an interesting conclusion, since both MLY’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.
How MLY’s assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine MLY’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. MLY’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 MLY 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 MLY’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 MLY. 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, MLY may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether MLY is a good investment for you, we also need to consider important company-specific fundamentals such as American CuMo Mining’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is MLY’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has MLY 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 MLY’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.