If you’re interested in Spectrum Pharmaceuticals Inc (NASDAQ:SPPI), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said ‘volatility is far from synonymous with risk’ in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What we can learn from SPPI’s beta value
Looking at the last five years, Spectrum Pharmaceuticals has a beta of 1.87. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that Spectrum Pharmaceuticals shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Spectrum Pharmaceuticals’s revenue and earnings in the image below.
How does SPPI’s size impact its beta?
Spectrum Pharmaceuticals is a small cap stock with a market capitalisation of US$1.4b. Most companies this size are actively traded. It has a relatively high beta, which is not unusual among small-cap stocks. Because it takes less capital to move the share price of a smaller company, actively traded small-cap stocks often have a higher beta that a similar large-cap stock.
What this means for you:
Since Spectrum Pharmaceuticals has a reasonably high beta, it’s worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Spectrum Pharmaceuticals’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Future Outlook: What are well-informed industry analysts predicting for SPPI’s future growth? Take a look at our free research report of analyst consensus for SPPI’s outlook.
- Past Track Record: Has SPPI 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 SPPI’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how SPPI measures up against other companies on valuation. You could start with this free list of prospective options.
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.