For Draganfly Investments Limited’s (AIM:DRG) 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 DRG. 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 second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
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. 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.
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An interpretation of DRG’s beta
Draganfly Investments’s beta of 0.79 indicates that the company is less volatile relative to the diversified market portfolio.This means that the change in DRG’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.DRG’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.
How does DRG’s size and industry impact its risk?
DRG, with its market capitalisation of GBP £1.14M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, DRG’s industry, diversified financials, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap DRG but a low beta for the diversified financials industry. This is an interesting conclusion, since both DRG’s size and industry indicates the stock should have a higher beta than it currently has.
Can DRG’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 DRG’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, DRG 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. Similarly, DRG’s beta value conveys the same message.
What this means for you:
Are you a shareholder? DRG may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as DRG is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, DRG may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in DRG, as well as where we are in the current economic cycle.
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 Draganfly Investments 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 Draganfly Investments anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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