If you are a shareholder in Canada Cobalt Works Inc’s (CVE:CCW), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as CCW. 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.
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.Check out our latest analysis for Canada Cobalt Works
An interpretation of CCW’s beta
With a five-year beta of 0.97, Canada Cobalt Works appears to be a less volatile company compared to the rest of the 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. CCW’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.
How does CCW’s size and industry impact its risk?
A market capitalisation of CA$45.62m puts CCW in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap CCW but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by CCW’s size and industry relative to its actual beta value.
Can CCW’s asset-composition point to a higher 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 CCW’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 CCW’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. Similarly, CCW’s beta value conveys the same message.
What this means for you:
CCW may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as CCW is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether CCW is a good investment for you, we also need to consider important company-specific fundamentals such as Canada Cobalt Works’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 CCW’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 CCW 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 CCW’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.