If you are a shareholder in Merrimack Pharmaceuticals Inc’s (NASDAQ:MACK), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. MACK 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 all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
See our latest analysis for MACK
What is MACK’s market risk?
Merrimack Pharmaceuticals’s five-year beta of 1.75 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, MACK may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Does MACK's size and industry impact the expected beta?
With a market cap of USD $173.96M, MACK falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, MACK’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 MACK, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests MACK 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.
How MACK's assets could affect its 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 MACK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since MACK’s fixed assets are only 12.05% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what MACK’s actual beta value suggests, which is higher stock volatility relative to the market.