If you are looking to invest in Bio-Path Holdings Inc’s (NASDAQ:BPTH), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
What does BPTH’s beta value mean?
Bio-Path Holdings’s five-year beta of 3.14 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. According to this value of beta, BPTH 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.
Could BPTH’s size and industry cause it to be more volatile?
A market capitalisation of USD $31.10M puts BPTH in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the pharmaceuticals 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 BPTH, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from BPTH’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How BPTH’s assets could affect its 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 test BPTH’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 account for less than a third of the company’s overall assets, BPTH seems to have a smaller dependency on fixed costs to generate revenue. 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 BPTH’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of BPTH’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into BPTH. For next steps, take a look at BPTH’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.
Are you a potential investor? I recommend that you look into BPTH’s fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. BPTH may be a great investment during times of economic growth. You can examine these factors in our free fundamental research report for BPTH 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.