Should You Have IKONICS Corporation’s (IKNX) In Your Portfolio?
If you are looking to invest in IKONICS Corporation’s (NASDAQ:IKNX), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for IKONICS
An interpretation of IKNX's beta
IKONICS’s beta of 0.33 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, IKNX appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could IKNX's size and industry cause it to be more volatile?
With a market cap of USD $16.82M, IKNX falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the chemicals industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap IKNX but a low beta for the chemicals industry. It seems as though there is an inconsistency in risks portrayed by IKNX’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can IKNX's asset-composition point to a higher 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 IKNX’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, IKNX appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect IKNX 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 IKNX’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto IKNX. 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, IKNX may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy IKNX, you should look at the stock in conjunction with their current portfolio holdings. IKNX may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping 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 IKONICS 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 IKONICS 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.
