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How Does Investing In Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) Impact The Volatility Of Your Portfolio?

If you’re interested in Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.

Some stocks are more sensitive to general market forces than others. Beta is a widely used metric to measure a stock’s exposure to market risk (volatility). Before we go on, it’s worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that ‘volatility is far from synonymous with risk.’ Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.

View our latest analysis for Vanda Pharmaceuticals

What VNDA’s beta value tells investors

Looking at the last five years, Vanda Pharmaceuticals has a beta of 0.85. The fact that this is well below 1 indicates that its share price movements haven’t historically been very sensitive to overall market volatility. This means that — if history is a guide — buying the stock would reduce the impact of overall market volatility in many portfolios (depending on the beta of the portfolio, of course). Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Vanda Pharmaceuticals fares in that regard, below.

NasdaqGM:VNDA Income Statement Export December 14th 18
NasdaqGM:VNDA Income Statement Export December 14th 18

How does VNDA’s size impact its beta?

With a market capitalisation of US$1.4b, Vanda Pharmaceuticals is a small cap stock. However, it is big enough to catch the attention of professional investors. Small cap stocks ofthen have a higher beta than the overall market. However, small companies can also be strongly impacted by company specific developments, which can move the share price in ways that are unrelated to the broader market. That could explain why this one has a low beta value.

What this means for you:

The Vanda Pharmaceuticals doesn’t usually show much sensitivity to the broader market. This could be for a variety of reasons. Typically, smaller companies have a low beta if their share price tends to move a lot due to company specific developments. Alternatively, an strong dividend payer might move less than the market because investors are valuing it for its income stream. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Vanda Pharmaceuticals’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for VNDA’s future growth? Take a look at our free research report of analyst consensus for VNDA’s outlook.

  2. Past Track Record: Has VNDA 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 VNDA’s historicals for more clarity.

  3. Other Interesting Stocks: It’s worth checking to see how VNDA measures up against other companies on valuation. You could start with this free list of prospective options.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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