If you are looking to invest in ARCA biopharma Inc’s (NASDAQ:ABIO), 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. The beta measures ABIO’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, 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.
An interpretation of ABIO’s beta
ARCA biopharma’s five-year beta of 1.84 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, ABIO can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does ABIO’s size and industry impact the expected beta?
A market capitalisation of USD $16.21M puts ABIO in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the biotechnology industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of ABIO, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests ABIO should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can ABIO’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 test ABIO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in ABIO’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect ABIO 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 ABIO’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 ABIO. 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 ABIO. For more company-specific research on ABIO, check out our our free analysis plaform here.
Are you a potential investor? Before you buy ABIO, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. ABIO 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. Continue your research on the stock with our free fundamental research report for ABIO here.
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.