If you are looking to invest in Cross Timbers Royalty Trust’s (NYSE:CRT), 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. The beta measures CRT’s exposure to the wider market risk, which reflects changes in economic and political factors. 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.
What is CRT’s market risk?
Cross Timbers Royalty Trust’s beta of 0.5 indicates that the stock value will be less variable compared to the whole stock market. 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. CRT’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.
Could CRT’s size and industry cause it to be more volatile?
A market capitalisation of US$81.06M puts CRT in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, CRT’s industry, oil and gas, 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 CRT but a low beta for the oil and gas industry. This is an interesting conclusion, since both CRT’s size and industry indicates the stock should have a higher beta than it currently has.
How CRT’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 CRT’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 an insignificant portion of total assets, CRT doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect CRT 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. Similarly, CRT’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto CRT. 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, CRT 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 Cross Timbers Royalty Trust’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is CRT’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.
- Past Track Record: Has CRT 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 CRT’s historicals for more clarity.
- 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.
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.