If you are looking to invest in Radius Health Inc’s (NASDAQ:RDUS), 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 RDUS. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as RDUS, because it is rare that an entire industry collapses at once. 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.
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. 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.
Check out our latest analysis for Radius Health
An interpretation of RDUS’s beta
Radius Health has a beta of 1.03, which means that its stock price experiences greater change than most. Based on this beta value, RDUS 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.
How does RDUS’s size and industry impact its risk?
RDUS, with its market capitalisation of US$1.03b, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, RDUS operates in the biotechs industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of RDUS, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from RDUS’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can RDUS’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 RDUS’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 less than a third of the company’s total assets, RDUS doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect RDUS 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 RDUS’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto RDUS. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether RDUS is a good investment for you, we also need to consider important company-specific fundamentals such as Radius Health’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 RDUS’s future growth? Take a look at our free research report of analyst consensus for RDUS’s outlook.
- Past Track Record: Has RDUS 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 RDUS’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.