For TrovaGene Inc’s (NASDAQ:TROV) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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 value 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.
An interpretation of TROV’s beta
TrovaGene’s beta of 0.38 indicates that the company is less volatile relative to the diversified market portfolio. 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, TROV appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does TROV’s size and industry impact its risk?
TROV, with its market capitalisation of USD $20.24M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, TROV’s industry, biotechnology, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of TROV, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests TROV should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How TROV’s assets could affect its 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 TROV’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since TROV’s fixed assets are only 25.59% 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. 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 TROV. 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. For next steps, take a look at TROV’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.
Are you a potential investor? Before you buy TROV, you should look at the stock in conjunction with their current portfolio holdings. TROV may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment. Continue your research on the stock with our free fundamental research report for TROV 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.