If you are looking to invest in Aethlon Medical Inc’s (NASDAQ:AEMD), 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. Generally, an investor should consider two types of risk that impact the market value of AEMD. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. 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.
Not all stocks are expose to the same level 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. 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 is AEMD’s market risk?
Aethlon Medical has a beta of 28.56, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements.According to this value of beta,AEMD may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does AEMD's size and industry impact the expected beta?
With a market cap of USD $14.15M, AEMD falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, AEMD’s industry, healthcare equipment and services, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap AEMD but a low beta for the healthcare equipment and services industry. It seems as though there is an inconsistency in risks from AEMD’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is AEMD's cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta.I examine AEMD’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, AEMD doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what AEMD’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto AEMD. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into AEMD.
Are you a potential investor? Before you buy AEMD, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. AEMD may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Aethlon Medical for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Aethlon Medical anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass 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.