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Is Now An Opportune Moment To Examine Frasers Group plc (LON:FRAS)?

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Frasers Group plc (LON:FRAS), might not be a large cap stock, but it received a lot of attention from a substantial price increase on the LSE over the last few months. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. But what if there is still an opportunity to buy? Let’s examine Frasers Group’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

See our latest analysis for Frasers Group

Is Frasers Group still cheap?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 25.67x is currently trading slightly above its industry peers’ ratio of 23.64x, which means if you buy Frasers Group today, you’d be paying a relatively reasonable price for it. And if you believe Frasers Group should be trading in this range, then there isn’t really any room for the share price grow beyond the levels of other industry peers over the long-term. Is there another opportunity to buy low in the future? Since Frasers Group’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Frasers Group look like?

earnings-and-revenue-growth
earnings-and-revenue-growth

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with an extremely negative double-digit change in profit expected next year, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Frasers Group, at least in the near future.

What this means for you:

Are you a shareholder? FRAS seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on FRAS, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on FRAS for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on FRAS should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Frasers Group at this point in time. While conducting our analysis, we found that Frasers Group has 2 warning signs and it would be unwise to ignore these.

If you are no longer interested in Frasers Group, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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