If you are a shareholder in Mesabi Trust’s (NYSE:MSB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 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. Not all stocks are expose to the same level 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.
What is MSB’s market risk?
With a five-year beta of 0.44, Mesabi Trust appears to be a less volatile company compared to the rest of the market. This means that the change in MSB’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, MSB appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does MSB’s size and industry impact the expected beta?
With a market cap of US$308.32M, MSB falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, MSB also operates in the metals and mining industry, which has commonly demonstrated strong reactions 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 MSB’s size and industry indicates the stock should have a higher beta than it currently has.
Is MSB’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 MSB’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in MSB’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, MSB’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto MSB. 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, MSB may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether MSB is a good investment for you, we also need to consider important company-specific fundamentals such as Mesabi Trust’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is MSB’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.
- Past Track Record: Has MSB 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 MSB’s historicals for more clarity.
- 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.