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. Broadly speaking, there are two types of risk you should consider when investing in stocks such as IMGN. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as IMGN, 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. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
An interpretation of IMGN's beta
ImmunoGen’s five-year beta of 2.36 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, IMGN will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does IMGN's size and industry impact its risk?
A market capitalisation of USD $763.10M puts IMGN 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. Therefore, investors can expect a high beta associated with the size of IMGN, but a lower beta given the nature of the industry it operates in. 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.
Can IMGN's asset-composition point to a higher 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 IMGN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with 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. Thus, we can expect IMGN 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. 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? Before you buy IMGN, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. IMGN 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 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.