Can Syncona Limited (LON:SYNC) Improve Your Portfolio Returns?

For Syncona Limited’s (LSE:SYNC) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as SYNC. 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. A widely-used metric to measure a stock's market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

An interpretation of SYNC's beta

Syncona’s beta of 0.02 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. SYNC’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.

Does SYNC's size and industry impact the expected beta?

With a market cap of £1.39B, SYNC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, SYNC’s industry, capital markets, 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 SYNC but a low beta for the capital markets industry. It seems as though there is an inconsistency in risks portrayed by SYNC’s size and industry relative to its actual beta value.

Can SYNC'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 test SYNC’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, SYNC doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect SYNC 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 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 SYNC. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, SYNC may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Syncona’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Financial Health: Is SYNC’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

2. Valuation: What is SYNC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SYNC is currently mispriced by the market.

3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.