Puma Biotechnology Inc (NASDAQ:PBYI): Risks You Need To Consider Before Buying

If you are looking to invest in Puma Biotechnology Inc’s (NASDAQ:PBYI), 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 PBYI. 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 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.

Not all stocks are expose 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. 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.

What does PBYI's beta value mean?

Puma Biotechnology's beta of 0.16 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. PBYI'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.

Could PBYI's size and industry cause it to be more volatile?

With a market capitalisation of US$2.34B, PBYI is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. In addition to size, PBYI 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 PBYI’s beta value discussed above. Next, we will examine the fundamental factors which can result in a more defensive nature of a stock.

Is PBYI's cost structure indicative of a high 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 test PBYI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since PBYI’s fixed assets are only 2.64% 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 PBYI 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, PBYI’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 PBYI. 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 Puma Biotechnology’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 PBYI’s future growth? Take a look at our free research report of analyst consensus for PBYI’s outlook.
• 2. Past Track Record: Has PBYI 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 PBYI'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.