Yahoo Finance How Should You Think About True North Gems Inc’s (TSXV:TGX) Risks?
If you are a shareholder in True North Gems Inc’s (TSXV:TGX), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of TGX. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your 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. A widely-used metric to measure a stock's market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for True North Gems
What is TGX’s market risk?
True North Gems’s beta of 0.29 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in TGX'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, TGX appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could TGX's size and industry cause it to be more volatile?
With a market cap of CAD $1.70M, TGX falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, TGX also operates in the materials industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap TGX but a low beta for the materials industry. This is an interesting conclusion, since both TGX’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
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. Thus, we can expect TGX 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. This outcome contradicts TGX’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto TGX. 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, TGX 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 TGX, you should look at the stock in conjunction with their current portfolio holdings. TGX 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 True North Gems 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 True North Gems 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.
