Before You Buy Montero Mining and Exploration Ltd's (CVE:MON), Consider This

If you are a shareholder in Montero Mining and Exploration Ltd’s (TSXV:MON), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as MON. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as MON, because it is rare that an entire industry collapses at once. 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. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

What is MON’s market risk?

With a five-year beta of 0.79, Montero Mining and Exploration appears to be a less volatile company compared to the rest of the market. This means that the change in MON'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. MON’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

How does MON's size and industry impact its risk?

With a market cap of CA$5.34M, MON falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, MON’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 a high beta for the small-cap MON but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by MON’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.

How MON'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 test MON’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. MON's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of MON indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts MON’s current beta value which indicates a below-average volatility.

What this means for you:

MON 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 MON is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether MON is a good investment for you, we also need to consider important company-specific fundamentals such as Montero Mining and Exploration’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Financial Health: Is MON’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.
2. Past Track Record: Has MON 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 MON'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.