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NewLink Genetics Corporation (NASDAQ:NLNK): What Does Its Beta Value Mean For Your Portfolio?

Simply Wall St

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Anyone researching NewLink Genetics Corporation (NASDAQ:NLNK) might want to consider the historical volatility of the share price. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks are more sensitive to general market forces than others. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said 'volatility is far from synonymous with risk' in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.

View our latest analysis for NewLink Genetics

What NLNK's beta value tells investors

Zooming in on NewLink Genetics, we see it has a five year beta of 1.35. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. If the past is any guide, we would expect that NewLink Genetics shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how NewLink Genetics fares in that regard, below.

NasdaqGM:NLNK Income Statement, July 9th 2019

Does NLNK's size influence the expected beta?

NewLink Genetics is a noticeably small company, with a market capitalisation of US$55m. Most companies this size are not always actively traded. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.

What this means for you:

Since NewLink Genetics tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as NewLink Genetics’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for NLNK’s future growth? Take a look at our free research report of analyst consensus for NLNK’s outlook.
  2. Past Track Record: Has NLNK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of NLNK's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how NLNK measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.