If you are a shareholder in Aurinia Pharmaceuticals Inc’s (NASDAQ:AUPH), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as AUPH. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as AUPH, 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.
What is AUPH’s market risk?
Aurinia Pharmaceuticals has a beta of 1.99, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements.According to this value of beta,AUPH can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does AUPH's size and industry impact the expected beta?
AUPH, with its market capitalisation of USD $562.69M, is a small-cap stock, which generally have higher beta than similar companies of larger size. 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 AUPH but a low beta for the pharmaceuticals, biotechnology and life sciences industry. This is an interesting conclusion, since its industry suggests AUPH should be less 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 AUPH'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 examine AUPH’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.Given that fixed assets make up less than a third of the company’s total assets, AUPH doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.Thus, we can expect AUPH 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 AUPH’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto AUPH. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into AUPH.
Are you a potential investor? Before you buy AUPH, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. AUPH may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 Aurinia Pharmaceuticals 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 Aurinia Pharmaceuticals 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.