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Why You Need To Look At This Factor Before Buying La Jolla Pharmaceutical Company (NASDAQ:LJPC)

Anyone researching La Jolla Pharmaceutical Company (NASDAQ:LJPC) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the market.

Some stocks are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.

Check out our latest analysis for La Jolla Pharmaceutical

What does LJPC’s beta value mean to investors?

Given that it has a beta of 1.4, we can surmise that the La Jolla Pharmaceutical share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, La Jolla Pharmaceutical shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see La Jolla Pharmaceutical’s revenue and earnings in the image below.

NasdaqCM:LJPC Income Statement Export October 16th 18
NasdaqCM:LJPC Income Statement Export October 16th 18

How does LJPC’s size impact its beta?

With a market capitalisation of US$462m, La Jolla Pharmaceutical is a very small company by global standards. It is quite likely to be unknown to most investors. 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 La Jolla Pharmaceutical has a reasonably high beta, it’s worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as La Jolla Pharmaceutical’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

  1. Future Outlook: What are well-informed industry analysts predicting for LJPC’s future growth? Take a look at our free research report of analyst consensus for LJPC’s outlook.

  2. Past Track Record: Has LJPC 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 LJPC’s historicals for more clarity.

  3. Other Interesting Stocks: It’s worth checking to see how LJPC measures up against other companies on valuation. You could start with this free list of prospective options.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.