Why You Need To Look At This Factor Before Buying MabVax Therapeutics Holdings Inc (MBVX)
If you are a shareholder in MabVax Therapeutics Holdings Inc’s (NASDAQ:MBVX), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as MBVX. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Not every stock is exposed to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta 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.
Check out our latest analysis for MabVax Therapeutics Holdings
What is MBVX’s market risk?
MabVax Therapeutics Holdings has a beta of 1.13, 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, MBVX 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.
How does MBVX's size and industry impact its risk?
With a market cap of USD $7.91M, MBVX falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, MBVX’s industry, pharmaceuticals, biotechnology and life sciences, 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 MBVX, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests MBVX 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 MBVX'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 MBVX’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, MBVX seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect MBVX 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 MBVX’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of MBVX'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 MBVX.
Are you a potential investor? I recommend that you look into MBVX's fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. MBVX may be a great investment during times of economic growth.
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 MabVax Therapeutics Holdings 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 MabVax Therapeutics Holdings 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.
