Should You Have Biostage Inc’s (BSTG) In Your Portfolio?
If you are a shareholder in Biostage Inc’s (NASDAQ:BSTG), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures BSTG’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level 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.
View our latest analysis for Biostage
What is BSTG’s market risk?
Biostage's beta of 0.05 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, BSTG appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could BSTG's size and industry cause it to be more volatile?
With a market cap of USD $4.22M, BSTG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, BSTG’s industry, biotechnology, 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 BSTG but a low beta for the biotechnology industry. It seems as though there is an inconsistency in risks from BSTG’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How BSTG'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 examine BSTG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, BSTG seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect BSTG 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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto BSTG. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 Biostage 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 Biostage 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.
