How Does Investing In Galena Biopharma Inc (GALE) Impact Your Portfolio?
For Galena Biopharma Inc’s (NASDAQ:GALE) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as GALE. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as GALE, 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.
Not every stock is exposed to the same level of market risk. A widely-used metric to measure a stock's market risk is beta, and the broad market index 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.
See our latest analysis for GALE
What does GALE's beta value mean?
Galena Biopharma’s five-year beta of 1.83 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, GALE may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does GALE's size and industry impact the expected beta?
A market capitalisation of USD $13.40M puts GALE in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the pharmaceuticals, biotechnology and life sciences 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 GALE but a low beta for the pharmaceuticals, biotechnology and life sciences industry. It seems as though there is an inconsistency in risks from GALE’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How GALE'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 GALE’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, GALE doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect GALE 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. However, this is the opposite to what GALE’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 GALE'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 GALE.
Are you a potential investor? I recommend that you look into GALE's fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. GALE may be a great investment during times of economic growth.
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 Galena Biopharma 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 Galena Biopharma 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.
