Anyone researching Xenon Pharmaceuticals Inc. (NASDAQ:XENE) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the 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. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
What we can learn from XENE's beta value
Given that it has a beta of 1.33, we can surmise that the Xenon Pharmaceuticals share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that Xenon Pharmaceuticals are likely to rise strongly in times of greed, but sell off in times of fear. Beta is worth considering, but it's also important to consider whether Xenon Pharmaceuticals is growing earnings and revenue. You can take a look for yourself, below.
How does XENE's size impact its beta?
Xenon Pharmaceuticals is a noticeably small company, with a market capitalisation of US$238m. Most companies this size are not always actively traded. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.
What this means for you:
Since Xenon Pharmaceuticals tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether XENE is a good investment for you, we also need to consider important company-specific fundamentals such as Xenon Pharmaceuticals’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for XENE’s future growth? Take a look at our free research report of analyst consensus for XENE’s outlook.
- Past Track Record: Has XENE 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 XENE's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how XENE measures up against other companies on valuation. You could start with this free list of prospective options.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.