Yahoo Finance Landore Resources Limited (AIM:LND): Risks You Need To Consider Before Buying
For Landore Resources Limited’s (AIM:LND) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as LND. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta 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.
See our latest analysis for LND
What is LND’s market risk?
With a beta of 1.55, Landore Resources is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, LND 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.
Could LND's size and industry cause it to be more volatile?
LND, with its market capitalisation of GBP £17.67M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the materials industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with LND’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
How LND'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 test LND’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, LND seems to have a smaller 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. This outcome contradicts LND’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of LND's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into LND.
Are you a potential investor? Before you buy LND, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. LND may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 Landore Resources 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 Landore Resources 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.
