If you are looking to invest in Minerva Neurosciences Inc’s (NASDAQ:NERV), 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. Generally, an investor should consider two types of risk that impact the market value of NERV. 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 every stock is exposed 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. 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.See our latest analysis for NERV
An interpretation of NERV’s beta
Minerva Neurosciences has a beta of 1.57, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, NERV may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could NERV’s size and industry cause it to be more volatile?
NERV, with its market capitalisation of USD $201.24M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, NERV’s industry, biotechnology, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap NERV but a low beta for the biotechnology industry. This is an interesting conclusion, since its industry suggests NERV should be less volatile than it actually is.
Is NERV’s cost structure indicative of a high 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 test NERV’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, NERV doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect NERV to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This outcome contradicts NERV’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. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. It’s always wise to take into account your portfolio sensitivity to the market before you invest in NERV, as well as where we are in the current economic cycle.
Are you a potential investor? Before you buy NERV, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. NERV 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. Take a look at our most recent infographic report on Minerva Neurosciences 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 Minerva Neurosciences anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.