Cazaly Resources Limited (ASX:CAZ): What Does It Mean For Your Portfolio?
If you are a shareholder in Cazaly Resources Limited’s (ASX:CAZ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Cazaly Resources
What is CAZ’s market risk?
Cazaly Resources’s beta of 0.2 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, CAZ appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does CAZ's size and industry impact the expected beta?
CAZ, with its market capitalisation of AUD $8.59M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, CAZ 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 CAZ but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by CAZ’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.
Can CAZ's asset-composition point to a higher 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 CAZ’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. CAZ'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. Thus, we can expect CAZ 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. However, this is the opposite to what CAZ’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto CAZ. 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, CAZ may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Depending on the composition of your portfolio, CAZ 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 CAZ, 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 Cazaly 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 Cazaly Resources anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
