https://simplywall.st/news/2017/10/14/how-does-investing-in-rooster-energy-ltd-tsxvcoq-impact-your-portfolio/
How Does Investing In Rooster Energy Ltd (TSXV:COQ) Impact Your Portfolio?
For Rooster Energy Ltd’s (TSXV:COQ) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as COQ. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as COQ, because it is rare that an entire industry collapses at once. 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.
Different characteristics of a stock expose it to various levels 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.
What does COQ’s beta value mean?
Rooster Energy’s five-year beta of 2.3 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, COQ can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does COQ’s size and industry impact the expected beta?
A market capitalisation of CAD $1.62M puts COQ in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, COQ’s industry, oil, gas and consumable fuels, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 supports our interpretation of COQ’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can COQ’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine COQ’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, COQ doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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 COQ’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto COQ. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into COQ.
Are you a potential investor? Before you buy COQ, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. COQ 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.
Another news here:
https://bankruptcompanynews.com/rooster-energy-bankruptcy-10-13-17/