The independent exploration and production company Cobalt International Energy Inc (NYSE:$CIE) has been on the radar of some Analysts. However, is the company worth the investment? Let’s look at the facts.
Companies like Cobalt inherently carry two types of risk; company-specific risk and market risk. Company-specific risk refers to the risks inherent to the stock itself. This type of risk can be combated with a diversified portfolio. Market risk, on the other hand, relies on factors outside the company, like changing legal restrictions or global conflict, which may negatively impact the business.
How Does Cobalt’s Beta Compare?
Since not all companies carry the same amount of risk, analysts and investors have to look at the beta – a comparison of the company against the broad market index – to determine each company’s risk. This is true in Cobalt’s case as well.
Cobalt’s beta is currently 1.78, which means that the company is more receptive to change during times of boom or bust. Because of the high volatility, Cobalt is a high-risk investment that could possibly give high rewards, but would best benefit a portfolio already stacked with low beta investments.
Is Cobalt in a Precarious Position?
Cobalt has two main things going against it. First, it’s market cap is $53.45 million, placing it in the small cap. Small-cap companies tend to be more risky investments that are more susceptible to shifts in the market. Secondly, Cobalt is in the high-risk energy industry, which has proven to be highly sensitive to market shocks in the past.
By comparing the company’s fixed assets to total assets, analysts see 30%, which indicates that the company spends a large portion of funds on assets that are hard to scale. This can be a sign of high volatility.
The Bottom Line
For a potential investor, this stock can be risky. It’s worth examining your own portfolio to see how the stock synergizes. It is also worth considering the market. As a high-risk investment, Cobalt can be a great earner in booms. The reverse is also true in times of economic downturn.
For shareholders, on the other hand, the high fixed assets shouldn’t be too much of a concern. As mentioned above, the stock is set to perform well during times of economic upturn. However, it may be better to consider a more defensive stock in times of economic bust.
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