How True North Gems Inc (CVE:TGX) Can Impact Your Portfolio Volatility
If you are looking to invest in True North Gems Inc’s (TSXV:TGX), 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. Not every stock is exposed 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.
Check out our latest analysis for True North Gems
What is TGX’s market risk?
True North Gems has a beta of 1.03, 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, TGX 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.
Does TGX’s size and industry impact the expected beta?
A market capitalisation of CA$1.54M puts TGX in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of TGX’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can TGX’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 examine TGX’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. TGX’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. As a result, this aspect of TGX indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.
What this means for you:
You could benefit from higher returns from TGX during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. What I have not mentioned in my article here are important company-specific fundamentals such as True North Gems’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is TGX’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 TGX 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 TGX’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.
