If you are a shareholder in Port Erin Biopharma Investments Limited’s (AIM:PEBI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as PEBI. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce 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. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Port Erin Biopharma Investments
What is PEBI’s market risk?
Port Erin Biopharma Investments’s beta of 0.91 indicates that the company is less volatile relative to the diversified market portfolio.This means that the change in PEBI’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index.PEBI’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does PEBI’s size and industry impact its risk?
PEBI, with its market capitalisation of GBP £1.30M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the diversified financials industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the diversified financials industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both PEBI’s size and industry indicates the stock should have a higher beta than it currently has.
How PEBI’s assets could affect its 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 PEBI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.Given that fixed assets make up less than a third of the company’s total assets, PEBI doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns.Thus, we can expect PEBI 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 could benefit from lower risk during times of economic decline by holding onto PEBI. 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. Depending on the composition of your portfolio, PEBI may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Depending on the composition of your portfolio, PEBI may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in PEBI, as well as where we are in the current economic cycle.
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 Port Erin Biopharma Investments 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 Port Erin Biopharma Investments anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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