For Avid Bioservices Inc’s (NASDAQ:CDMO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures CDMO’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
What is CDMO’s market risk?
With a beta of 2.24, Avid Bioservices is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, CDMO 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.
Does CDMO’s size and industry impact the expected beta?
With a market cap of US$178.32M, CDMO falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, CDMO’s industry, biotechs, 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 CDMO but a low beta for the biotechs industry. It seems as though there is an inconsistency in risks from CDMO’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can CDMO’s asset-composition point to a higher 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 examine CDMO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, CDMO appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect CDMO to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, CDMO’s beta value conveys the same message.
What this means for you:
You may reap the gains of CDMO’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. In order to fully understand whether CDMO is a good investment for you, we also need to consider important company-specific fundamentals such as Avid Bioservices’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is CDMO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CDMO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CDMO’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.