Should You Be Holding Nu-Oil and Gas plc (AIM:NUOG) Right Now?
If you are a shareholder in Nu-Oil and Gas plc’s (AIM:NUOG), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as NUOG. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. 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 every stock is exposed to the same level of market risk. A widely-used metric to measure a stock's market risk is beta, and the broad market index 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.
See our latest analysis for NUOG
What is NUOG’s market risk?
With a five-year beta of 0.6, Nu-Oil and Gas appears to be a less volatile company compared to the rest of the market.The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more.NUOG’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does NUOG's size and industry impact its risk?
With a market cap of GBP £13.09M, NUOG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, NUOG’s industry, energy, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the energy industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by NUOG’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.
How NUOG'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 examine NUOG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.Given that fixed assets make up less than a third of the company’s total assets, NUOG doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.Thus, we can expect NUOG 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, NUOG’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto NUOG. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? Before you buy NUOG, you should look at the stock in conjunction with their current portfolio holdings. NUOG may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
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 Nu-Oil and Gas 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 Nu-Oil and Gas 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.
