If you are looking to invest in Cariboo Rose Resources Ltd’s (TSXV:CRB), 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. Generally, an investor should consider two types of risk that impact the market value of CRB. 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 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. 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 Cariboo Rose Resources
What is CRB’s market risk?
Cariboo Rose Resources’s five-year beta of 4.07 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index.According to this value of beta,CRB may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does CRB’s size and industry impact the expected beta?
A market capitalisation of CAD $4.47M puts CRB in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, CRB also operates in the materials industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the X industry, relative to those more well-established firms in a more defensive industry. This is consistent with CRB’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
How CRB’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 test CRB’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint.Given that fixed assets make up less than a third of the company’s total assets, CRB doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.Thus, we can expect CRB to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what CRB’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto CRB. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into CRB.
Are you a potential investor? Before you buy CRB, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. CRB may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Cariboo Rose Resources for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Cariboo Rose Resources anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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