If you are looking to invest in Strikewell Energy Corp’s (TSXV:SKK), 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. The beta measures SKK’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed 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.
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An interpretation of SKK's beta
Strikewell Energy’s beta of 0.52 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. SKK’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could SKK's size and industry cause it to be more volatile?
SKK, with its market capitalisation of CAD $1.21M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, SKK also operates in the oil, gas and consumable fuels industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap SKK but a low beta for the oil, gas and consumable fuels industry. It seems as though there is an inconsistency in risks portrayed by SKK’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can SKK'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 test SKK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, SKK appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect SKK 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. However, this is the opposite to what SKK’s actual beta value suggests, which is lower stock volatility relative to the market.