How Does Lodestar Minerals Limited (ASX:LSR) Affect Your Portfolio Returns?
If you are a shareholder in Lodestar Minerals Limited’s (ASX:LSR), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. LSR is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. 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. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Lodestar Minerals
An interpretation of LSR’s beta
Lodestar Minerals’s beta of 0.24 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, LSR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does LSR’s size and industry impact the expected beta?
LSR, with its market capitalisation of AUD A$21.62M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, LSR’s industry, metals and mining, 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 LSR but a low beta for the metals and mining industry. This is an interesting conclusion, since both LSR’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.
How LSR’s assets could affect its 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 test LSR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, LSR seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect LSR 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 LSR’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
LSR 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 LSR is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether LSR is a good investment for you, we also need to consider important company-specific fundamentals such as Lodestar Minerals’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Financial Health: Is LSR’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.
2. Past Track Record: Has LSR 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 LSR’s historicals for more clarity.
3. 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.
