How Does Investing In Antilles Oil and Gas NL (ASX:AVD) Impact Your Portfolio?
If you are a shareholder in Antilles Oil and Gas NL’s (ASX:AVD), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures AVD’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, 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 Antilles Oil and Gas
What is AVD’s market risk?
Antilles Oil and Gas’s five-year beta of 1.58 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, AVD can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does AVD’s size and industry impact the expected beta?
A market capitalisation of AUD A$3.20M puts AVD in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the oil and gas industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of AVD’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is AVD’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 test AVD’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, AVD doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect AVD 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 AVD’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 AVD. 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 AVD. For more company-specific research on AVD, check out our our free analysis plaform here.
Are you a potential investor? Before you buy AVD, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. AVD 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. Continue your research on the stock with our free fundamental research report for AVD 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.
