Before You Buy NeuroMetrix Inc’s (NURO), You Should Consider This
If you are a shareholder in NeuroMetrix Inc’s (NASDAQ:NURO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as NURO. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as NURO, because it is rare that an entire industry collapses at once. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels of market risk. The most widely used metric to quantify a stock's market risk is beta, 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 NeuroMetrix
An interpretation of NURO's beta
With a five-year beta of 0.36, NeuroMetrix appears to be a less volatile company compared to the rest of the 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. NURO's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does NURO's size and industry impact its risk?
A market capitalisation of USD $4.08M puts NURO in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the healthcare equipment and services industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap NURO but a low beta for the X industry. It seems as though there is an inconsistency in risks from NURO’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is NURO's cost structure indicative of a high 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 NURO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, NURO doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect NURO 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 could benefit from lower risk during times of economic decline by holding onto NURO. 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 NURO.
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 NeuroMetrix 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 NeuroMetrix 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.
