If you are looking to invest in Cleveland BioLabs Inc’s (NASDAQ:CBLI), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. There are two types of risks that affect the market value of a listed company such as CBLI. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CBLI, because it is rare that an entire industry collapses at once. 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. A widely-used metric to measure a stock's market risk is beta, and the broad market index represents a beta value 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 is CBLI’s market risk?
Cleveland BioLabs’s beta of 0.22 indicates that the company is less volatile relative to the diversified market portfolio.This means that the change in CBLI's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index.Based on this beta value, CBLI appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does CBLI's size and industry impact the expected beta?
With a market cap of USD $33.84M, CBLI falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, CBLI’s industry, pharmaceuticals, biotechnology and life sciences, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of CBLI, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from CBLI’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can CBLI's asset-composition point to a higher 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 CBLI’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 CBLI’s fixed assets are only 0.19% 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 CBLI 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto CBLI. 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 CBLI.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 Cleveland BioLabs 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 Cleveland BioLabs 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.