If you are a shareholder in Sangamo Therapeutics Inc’s (NASDAQ:SGMO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. SGMO 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
An interpretation of SGMO's beta
Sangamo Therapeutics has a beta of 3.15, 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, SGMO will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Does SGMO's size and industry impact the expected beta?
A market capitalisation of USD $1.15B puts SGMO in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, SGMO operates in the biotechnology industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap SGMO but a low beta for the biotechnology industry. This is an interesting conclusion, since its industry suggests SGMO should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can SGMO's asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine SGMO’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 SGMO’s fixed assets are only 2.95% 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 SGMO 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 SGMO’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 SGMO. 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 SGMO.
Are you a potential investor? Before you buy SGMO, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. SGMO 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 Sangamo Therapeutics 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 Sangamo Therapeutics 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.