If you are a shareholder in Tirex Resources Ltd’s (TSXV:TXX), 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 TXX. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as TXX, 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 does TXX’s beta value mean?
Tirex Resources’s beta of 0.21 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. TXX’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. TSXV:TXX Income Statement Nov 4th 17
Could TXX’s size and industry cause it to be more volatile?
A market capitalisation of CAD CA$4.59M puts TXX in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, TXX 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 TXX but a low beta for the metals and mining industry. This is an interesting conclusion, since both TXX’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 TXX’s cost structure indicative of a high 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 TXX’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. TXX’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 TXX 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 TXX’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? TXX 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 TXX is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, TXX may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in TXX, as well as where we are in the current economic cycle.
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 Tirex 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 Tirex 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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