If you are looking to invest in CHF Solutions Inc’s (NASDAQ:CHFS), 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. Broadly speaking, there are two types of risk you should consider when investing in stocks such as CHFS. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CHFS, because it is rare that an entire industry collapses at once. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Different characteristics of a stock expose it to various levels of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value 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.View our latest analysis for CHF Solutions
What does CHFS’s beta value mean?
CHF Solutions has a beta of 2.25, 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. According to this value of beta, CHFS can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could CHFS’s size and industry cause it to be more volatile?
A market capitalisation of US$12.78M puts CHFS in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, CHFS operates in the medical equipment industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap CHFS but a low beta for the medical equipment industry. This is an interesting conclusion, since its industry suggests CHFS should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How CHFS’s assets could affect its 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 CHFS’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 less than a third of the company’s total assets, CHFS 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 outcome contradicts CHFS’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of CHFS’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into CHFS. In order to fully understand whether CHFS is a good investment for you, we also need to consider important company-specific fundamentals such as CHF Solutions’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CHFS’s future growth? Take a look at our free research report of analyst consensus for CHFS’s outlook.
- Past Track Record: Has CHFS 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 CHFS’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.