If you are a shareholder in Minerva Neurosciences Inc’s (NASDAQ:NERV), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as NERV. 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. 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.
See our latest analysis for Minerva Neurosciences
An interpretation of NERV’s beta
With a beta of 1.45, Minerva Neurosciences is a stock that tends to see greater volatility than the market at large. According to this beta value, NERV 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.
Does NERV’s size and industry impact the expected beta?
NERV, with its market capitalisation of US$327.64m, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the biotechs industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap NERV but a low beta for the biotechs industry. This is an interesting conclusion, since its industry suggests NERV should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can NERV’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 NERV’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, NERV doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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 NERV’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of NERV’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 NERV. In order to fully understand whether NERV is a good investment for you, we also need to consider important company-specific fundamentals such as Minerva Neurosciences’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 NERV’s future growth? Take a look at our free research report of analyst consensus for NERV’s outlook.
- Past Track Record: Has NERV 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 NERV’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 editorial-team@simplywallst.com.