If you are a shareholder in Novelion Therapeutics Inc’s (NASDAQ:NVLN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures NVLN’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
An interpretation of NVLN’s beta
With a five-year beta of 0.36, Novelion Therapeutics appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, NVLN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could NVLN’s size and industry cause it to be more volatile?
NVLN, with its market capitalisation of USD $74.42M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, NVLN’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 NVLN, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests NVLN should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is NVLN’s cost structure indicative of a high 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 NVLN’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 NVLN’s fixed assets are only 4.69% 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 NVLN 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 may reap the benefit of muted movements during times of economic decline by holding onto NVLN. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock. For more company-specific research on NVLN, check out our our free analysis plaform here.
Are you a potential investor? Before you buy NVLN, you should look at the stock in conjunction with their current portfolio holdings. NVLN may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment. You can examine these factors in our free fundamental research report for NVLN 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.