If you own shares in Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) then it’s worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said ‘volatility is far from synonymous with risk’ in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.
What does LXRX’s beta value mean to investors?
Given that it has a beta of 0.83, we can surmise that the Lexicon Pharmaceuticals share price has not been strongly impacted by broader market volatility (over the last 5 years). This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio’s weighted average beta is higher than 0.83. Beta is worth considering, but it’s also important to consider whether Lexicon Pharmaceuticals is growing earnings and revenue. You can take a look for yourself, below.
Could LXRX’s size cause it to be more volatile?
With a market capitalisation of US$561m, Lexicon Pharmaceuticals is a small cap stock. However, it is big enough to catch the attention of professional investors. Small companies can have a low beta value when company specific factors outweigh the influence of overall market volatility. That might be happening here.
What this means for you:
The Lexicon Pharmaceuticals doesn’t usually show much sensitivity to the broader market. This could be for a variety of reasons. Typically, smaller companies have a low beta if their share price tends to move a lot due to company specific developments. Alternatively, an strong dividend payer might move less than the market because investors are valuing it for its income stream. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Lexicon Pharmaceuticals’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Future Outlook: What are well-informed industry analysts predicting for LXRX’s future growth? Take a look at our free research report of analyst consensus for LXRX’s outlook.
- Past Track Record: Has LXRX been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of LXRX’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how LXRX measures up against other companies on valuation. You could start with this free list of prospective options.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.