For Bio-Path Holdings Inc’s (NASDAQ:BPTH) 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 BPTH. 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 other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.Check out our latest analysis for Bio-Path Holdings
What does BPTH’s beta value mean?
With a beta of 2.76, Bio-Path Holdings is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, BPTH 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 BPTH’s size and industry cause it to be more volatile?
A market capitalisation of US$19.52M puts BPTH in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, BPTH 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 BPTH, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from BPTH’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can BPTH’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine BPTH’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since BPTH’s fixed assets are only 7.38% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect BPTH 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. However, this is the opposite to what BPTH’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto BPTH. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether BPTH is a good investment for you, we also need to consider important company-specific fundamentals such as Bio-Path Holdings’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is BPTH’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.
- Past Track Record: Has BPTH 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 BPTH’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.