If you are a shareholder in ARCA biopharma Inc’s (NASDAQ:ABIO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. ABIO is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value 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.
What is ABIO’s market risk?
ARCA biopharma has a beta of 1.94, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, ABIO 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 ABIO’s size and industry impact the expected beta?
ABIO, with its market capitalisation of USD $19.39M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, ABIO’s industry, biotechs, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap ABIO but a low beta for the biotechs industry. It seems as though there is an inconsistency in risks from ABIO’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can ABIO’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 test ABIO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, ABIO doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ABIO 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 ABIO’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of ABIO’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 ABIO. In order to fully understand whether ABIO is a good investment for you, we also need to consider important company-specific fundamentals such as ARCA biopharma’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- 1. Financial Health: Is ABIO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- 2. Past Track Record: Has ABIO 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 ABIO’s historicals for more clarity.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.