If you are a shareholder in Neuren Pharmaceuticals Limited’s (ASX:NEU), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of NEU. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as NEU, because it is rare that an entire industry collapses at once. 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. 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 Neuren Pharmaceuticals
What does NEU’s beta value mean?
Neuren Pharmaceuticals’s beta of 0.35 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in NEU’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. Based on this beta value, NEU appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does NEU’s size and industry impact its risk?
With a market cap of AU$300.94M, NEU falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, NEU operates in the pharmaceuticals industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of NEU, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests NEU should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is NEU’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 NEU’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, NEU 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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto NEU. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Neuren Pharmaceuticals’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for NEU’s future growth? Take a look at our free research report of analyst consensus for NEU’s outlook.
- Past Track Record: Has NEU 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 NEU’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.