Before You Buy NewLink Genetics Corporation (NASDAQ:NLNK), Consider Its Volatility

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If you own shares in NewLink Genetics Corporation (NASDAQ:NLNK) then it’s worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.

See our latest analysis for NewLink Genetics

What NLNK’s beta value tells investors

Zooming in on NewLink Genetics, we see it has a five year beta of 1.79. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. Based on this history, investors should be aware that NewLink Genetics are likely to rise strongly in times of greed, but sell off in times of fear. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how NewLink Genetics fares in that regard, below.

NasdaqGM:NLNK Income Statement, May 10th 2019
NasdaqGM:NLNK Income Statement, May 10th 2019

How does NLNK’s size impact its beta?

NewLink Genetics is a rather small company. It has a market capitalisation of US$62m, which means it is probably under the radar of most investors. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.

What this means for you:

Beta only tells us that the NewLink Genetics share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there’s plenty more to learn. In order to fully understand whether NLNK is a good investment for you, we also need to consider important company-specific fundamentals such as NewLink Genetics’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for NLNK’s future growth? Take a look at our free research report of analyst consensus for NLNK’s outlook.
  2. Past Track Record: Has NLNK 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 NLNK’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how NLNK measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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