If you are looking to invest in Insmed Incorporated’s (NASDAQ:INSM), 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. There are two types of risks that affect the market value of a listed company such as INSM. 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 second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
An interpretation of INSM’s beta
Insmed’s five-year beta of 1.08 means that the company’s value is expected to be more volatile than average. Based on this beta value, INSM will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could INSM’s size and industry cause it to be more volatile?
INSM, with its market capitalisation of US$1.71b, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, INSM’s industry, biotechs, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of INSM, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from INSM’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How INSM’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 INSM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since INSM’s fixed assets are only 2.47% 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 INSM 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 INSM’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You may reap the gains of INSM’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 INSM. What I have not mentioned in my article here are important company-specific fundamentals such as Insmed’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 INSM’s future growth? Take a look at our free research report of analyst consensus for INSM’s outlook.
- Past Track Record: Has INSM 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 INSM’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.