One Thing To Consider Before Buying BioSpecifics Technologies Corp (BSTC)
If you are looking to invest in BioSpecifics Technologies Corp’s (NASDAQ:BSTC), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole 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.
View our latest analysis for BioSpecifics Technologies
An interpretation of BSTC's beta
BioSpecifics Technologies has a beta of 1.78, 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. According to this value of beta, BSTC can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could BSTC's size and industry cause it to be more volatile?
With a market cap of USD $333.28M, BSTC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, BSTC’s industry, biotechnology, 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 BSTC, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from BSTC’s size and industry.
Is BSTC's cost structure indicative of a high 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 BSTC’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, BSTC seems to have a smaller dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what BSTC’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 reap the gains of BSTC's returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as BSTC is valuable to pump up your returns, in particular, during times of economic growth.
Are you a potential investor? Before you buy BSTC, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. BSTC 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 BioSpecifics Technologies 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 BioSpecifics Technologies 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.
