One Thing To Consider Before Buying Exact Sciences Corporation (NASDAQ:EXAS)

For Exact Sciences Corporation’s (NASDAQ:EXAS) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as EXAS. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your 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.

Not every stock is exposed 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

An interpretation of EXAS's beta

With a five-year beta of 0.86, Exact Sciences appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. EXAS's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

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

A market capitalisation of US$7.14B puts EXAS in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. In addition to size, EXAS also operates in the biotechs industry, which has commonly demonstrated muted reactions to market-wide shocks. Hence, investors should expect a lower beta for larger companies operating in a defensive industry in contrast with higher beta for smaller firms in a more cyclical industry. This supports our interpretation of EXAS’s beta value discussed above. Next, we will examine the fundamental factors which can result in a more defensive nature of a stock.

Is EXAS'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 EXAS’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, EXAS doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect EXAS 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. Similarly, EXAS’s beta value conveys the same message.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto EXAS. 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 Exact Sciences’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for EXAS’s future growth? Take a look at our free research report of analyst consensus for EXAS’s outlook.
2. Past Track Record: Has EXAS 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 EXAS's historicals for more clarity.
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.