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While M Winkworth PLC (LON:WINK) might not be the most widely known stock at the moment, it saw a double-digit share price rise of over 10% in the past couple of months on the AIM. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s examine M Winkworth’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What's the opportunity in M Winkworth?
According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that M Winkworth’s ratio of 9.66x is trading slightly below its industry peers’ ratio of 10.25x, which means if you buy M Winkworth today, you’d be paying a decent price for it. And if you believe that M Winkworth should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. In addition to this, it seems like M Winkworth’s share price is quite stable, which could mean there may be less chances to buy low in the future now that it’s trading around the price multiples of other industry peers. This is because the stock is less volatile than the wider market given its low beta.
What kind of growth will M Winkworth generate?
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. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with an expected decline of -0.5% in revenues over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for M Winkworth. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? WINK 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 WINK, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on WINK 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. In addition to this, 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 gel your views on WINK should the price fluctuate below the industry PE ratio.
So while earnings quality is important, it's equally important to consider the risks facing M Winkworth at this point in time. For instance, we've identified 3 warning signs for M Winkworth (1 shouldn't be ignored) you should be familiar with.
If you are no longer interested in M Winkworth, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.