For NatureBank Asset Management Inc’s (TSXV:COO) 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 COO. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Different characteristics of a stock expose it to various levels of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index 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 NatureBank Asset Management
What does COO’s beta value mean?
With a beta of 2.09, NatureBank Asset Management is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, COO will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could COO’s size and industry cause it to be more volatile?
A market capitalisation of CA$1.05M puts COO in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, COO also operates in the commercial services industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with COO’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How COO’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 COO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, COO 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. However, this is the opposite to what COO’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You may reap the gains of COO’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into COO. What I have not mentioned in my article here are important company-specific fundamentals such as NatureBank Asset Management’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is COO’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 COO 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 COO’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.