If you are a shareholder in Copper Strike Limited’s (ASX:CSE), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of CSE. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CSE, because it is rare that an entire industry collapses at once. 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.View our latest analysis for Copper Strike
An interpretation of CSE’s beta
With a five-year beta of 0.95, Copper Strike appears to be a less volatile company compared to the rest of the 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, CSE appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could CSE’s size and industry cause it to be more volatile?
CSE, with its market capitalisation of AU$23.51M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both CSE’s size and industry indicates the stock should have a higher beta than it currently has.
How CSE’s assets could affect its 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 examine CSE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in CSE’s operations, it has low dependency on fixed costs to generate revenue. 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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto CSE. 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, CSE may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether CSE is a good investment for you, we also need to consider important company-specific fundamentals such as Copper Strike’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 CSE’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 CSE 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 CSE’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.