If you are looking to invest in Alcobra Ltd’s (NASDAQ:ADHD), 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. ADHD is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and 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 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 does ADHD's beta value mean?
Alcobra has a beta of 1.47, 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, ADHD will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could ADHD's size and industry cause it to be more volatile?
A market capitalisation of USD $27.29M puts ADHD in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, ADHD operates in the pharmaceuticals industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of ADHD, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from ADHD’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is ADHD'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 ADHD’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since ADHD’s fixed assets are only 0.50% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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 ADHD’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 ADHD'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 ADHD.
Are you a potential investor? Before you buy ADHD, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. ADHD 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 Alcobra 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 Alcobra 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.