If you own shares in Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) 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 category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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. 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. 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.
What VNDA’s beta value tells investors
Given that it has a beta of 0.85, we can surmise that the Vanda Pharmaceuticals share price has not been strongly impacted by broader market volatility (over the last 5 years). If history is a good guide, owning the stock should help ensure that your portfolio is not overly sensitive to market volatility. Beta is worth considering, but it’s also important to consider whether Vanda Pharmaceuticals is growing earnings and revenue. You can take a look for yourself, below.
Could VNDA’s size cause it to be more volatile?
Vanda Pharmaceuticals is a small company, but not tiny and little known. It has a market capitalisation of US$1.4b, which means it would be on the radar of intstitutional investors. Small companies often have a high beta value, but they can be heavily influenced by company-specific events. This might explain why this stock has a low beta.
What this means for you:
The Vanda Pharmaceuticals doesn’t usually show much sensitivity to the broader market. This could be for a variety of reasons. Typically, smaller companies have a low beta if their share price tends to move a lot due to company specific developments. Alternatively, an strong dividend payer might move less than the market because investors are valuing it for its income stream. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Vanda 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 VNDA’s future growth? Take a look at our free research report of analyst consensus for VNDA’s outlook.
- Past Track Record: Has VNDA 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 VNDA’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how VNDA 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.