If you are looking to invest in Independence Gold Corp’s (TSXV:IGO), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as IGO. 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 every stock is exposed 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.Check out our latest analysis for Independence Gold
What is IGO’s market risk?
With a beta of 1.67, Independence Gold 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, IGO can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does IGO’s size and industry impact its risk?
With a market cap of CA$6.45M, IGO falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, IGO’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 higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with IGO’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can IGO’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 IGO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, IGO appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect IGO to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, IGO’s beta value conveys the same message.
What this means for you:
You could benefit from higher returns from IGO during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Independence Gold’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
1. Future Outlook: What are well-informed industry analysts predicting for IGO’s future growth? Take a look at our free research report of analyst consensus for IGO’s outlook.
2. Past Track Record: Has IGO 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 IGO’s historicals for more clarity.
3. 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.