If you are looking to invest in Lamêlée Iron Ore Ltd’s (TSXV:LIR), 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. LIR 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. Not all stocks are expose to the same level 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.
What does LIR's beta value mean?
With a five-year beta of 0.73, Lamêlée Iron Ore appears to be a less volatile company compared to the rest of the market. This means that the change in LIR's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, LIR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does LIR's size and industry impact its risk?
LIR, with its market capitalisation of CAD $614.05K, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the metals and mining 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 metals and mining industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both LIR’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.
Is LIR'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 examine LIR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. LIR's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect LIR 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 LIR’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 LIR. 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, LIR 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 LIR, you should look at the stock in conjunction with their current portfolio holdings. LIR 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 Lamêlée Iron Ore 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 Lamêlée Iron Ore 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.