If you are a shareholder in Canstar Resources Inc’s (TSXV:ROX), 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 ROX. 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 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. 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.View our latest analysis for Canstar Resources
An interpretation of ROX’s beta
Canstar Resources’s beta of 0.18 indicates that the company is less volatile relative to the diversified market portfolio. 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. ROX’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.
Does ROX’s size and industry impact the expected beta?
With a market cap of CA$4.11M, ROX falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, ROX also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ROX but a low beta for the metals and mining industry. This is an interesting conclusion, since both ROX’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is ROX’s cost structure indicative of a high 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 ROX’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 a fixed to total assets ratio of over 30%, ROX seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of ROX indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what ROX’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto ROX. 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, ROX may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Canstar Resources’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Financial Health: Is ROX’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 ROX 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 ROX’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.