InspireMD Inc (NSPR): What Does It Mean For Your Portfolio?
For InspireMD Inc’s (AMEX:NSPR) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of NSPR. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Different characteristics of a stock expose it to various levels 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.
Check out our latest analysis for InspireMD
What is NSPR’s market risk?
InspireMD’s five-year beta of 1.7 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, NSPR may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does NSPR's size and industry impact the expected beta?
A market capitalisation of USD $2.54M puts NSPR in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the healthcare equipment and services 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 NSPR but a low beta for the healthcare equipment and services industry. It seems as though there is an inconsistency in risks from NSPR’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How NSPR's assets could affect its 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 NSPR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since NSPR’s fixed assets are only 9.97% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect NSPR 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 NSPR’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 NSPR. 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 NSPR.
Are you a potential investor? Before you buy NSPR, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. NSPR 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 InspireMD 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 InspireMD 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.
