If you are looking to invest in Concert Pharmaceuticals Inc’s (NASDAQ:CNCE), 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 CNCE. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CNCE, 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.
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.
What is CNCE’s market risk?
Concert Pharmaceuticals’s five-year beta of 1.09 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, CNCE 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 CNCE’s size and industry cause it to be more volatile?
With a market cap of US$379.48m, CNCE falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, CNCE’s industry, biotechs, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap CNCE but a low beta for the biotechs industry. This is an interesting conclusion, since its industry suggests CNCE 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.
Is CNCE’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 examine CNCE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, CNCE seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect CNCE 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 CNCE’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 CNCE. 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 Concert 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 CNCE’s future growth? Take a look at our free research report of analyst consensus for CNCE’s outlook.
- Past Track Record: Has CNCE 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 CNCE’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.