For Chongherr Investments Ltd’s (ASX:CDH) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as CDH. 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 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. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta 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 Chongherr Investments
An interpretation of CDH’s beta
Chongherr Investments’s beta of 0.67 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in CDH’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. CDH’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could CDH’s size and industry cause it to be more volatile?
CDH, with its market capitalisation of AU$651.04K, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, CDH also operates in the basic materials industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap CDH but a low beta for the basic materials industry. It seems as though there is an inconsistency in risks portrayed by CDH’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 CDH’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 CDH’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, CDH doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, CDH’s beta value conveys the same message.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto CDH. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether CDH is a good investment for you, we also need to consider important company-specific fundamentals such as Chongherr Investments’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is CDH’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 CDH 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 CDH’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.