For Fluidigm Corporation’s (NASDAQ:FLDM) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of FLDM. 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 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 every stock is exposed to the same level 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.See our latest analysis for Fluidigm
An interpretation of FLDM’s beta
Fluidigm’s five-year beta of 3.25 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. According to this value of beta, FLDM 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.
How does FLDM’s size and industry impact its risk?
With a market cap of US$222.22M, FLDM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, FLDM’s industry, life sciences, 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 FLDM but a low beta for the life sciences industry. It seems as though there is an inconsistency in risks from FLDM’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can FLDM’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 examine FLDM’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 FLDM’s fixed assets are only 10.64% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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 FLDM’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of FLDM’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 FLDM. What I have not mentioned in my article here are important company-specific fundamentals such as Fluidigm’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- 1. Future Outlook: What are well-informed industry analysts predicting for FLDM’s future growth? Take a look at our free research report of analyst consensus for FLDM’s outlook.
- 2. Past Track Record: Has FLDM 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 FLDM’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.