If you are a shareholder in ImmunoGen Inc’s (NASDAQ:IMGN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures IMGN’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 of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
What does IMGN's beta value mean?
With a beta of 2.36, ImmunoGen 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. According to this value of beta, IMGN 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 IMGN's size and industry impact the expected beta?
A market capitalisation of USD $883.57M puts IMGN in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, IMGN operates in the biotechnology industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap IMGN but a low beta for the biotechnology industry. This is an interesting conclusion, since its industry suggests IMGN 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.
Is IMGN's cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine IMGN’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, IMGN seems to have a smaller dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts IMGN’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of IMGN'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 IMGN.
Are you a potential investor? I recommend that you look into IMGN'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. IMGN 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 ImmunoGen 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 ImmunoGen 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.