What Are The Drivers Of GoldON Resources Ltd’s (TSXV:GLD) Risks?
If you are looking to invest in GoldON Resources Ltd’s (TSXV:GLD), 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. Generally, an investor should consider two types of risk that impact the market value of GLD. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as GLD, because it is rare that an entire industry collapses at once. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta 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.
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An interpretation of GLD's beta
GoldON Resources has a beta of 2.95, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, GLD may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does GLD's size and industry impact its risk?
A market capitalisation of CAD $1.56M puts GLD in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the materials 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 materials industry, relative to those more well-established firms in a more defensive industry. This is consistent with GLD’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is GLD'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 test GLD’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since GLD’s fixed assets are only 13.66% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect GLD 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 GLD’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 GLD. 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 GLD.
Are you a potential investor? I recommend that you look into GLD's fundamental factors such as its current valuation and financial health. 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. GLD may be a great investment during times of economic growth.
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 GoldON 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 GoldON 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.
