Approach Resources Inc (NASDAQ:AREX), an energy company based in United States, received a lot of attention from a substantial price movement on the NasdaqGS in the over the last few months, increasing to $2.81 at one point, and dropping to the lows of $2.23. This high level of volatility gives investors the opportunity to enter into the stock, and potentially buy at an artificially low price. A question to answer is whether AREX’s current trading price of $2.25 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at AREX’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change. Check out our latest analysis for Approach Resources
What’s the opportunity in AREX?
According to my relative valuation model, AREX seems to be currently fairly priced. In this instance, I’ve used the price-to-book (PB) ratio given that there is not enough information to reliably forecast the stock’s cash flows, and its earnings doesn’t seem to reflect its true value. I find that AREX’s ratio of 0.4x is trading slightly below its industry peers’ ratio of 1.6x, which means if you buy AREX today, you’d be paying a relatively fair price for it. And if you believe AREX should be trading in this range, then there isn’t much room for the share price grow beyond what it’s currently trading. Although, there may be an opportunity to buy in the future. This is because AREX’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, AREX’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
What does the future of AREX look like?
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. In the upcoming year, AREX’s earnings are expected to increase by 63.29%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? AREX’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at AREX? Will you have enough confidence to invest in the company should the price drop below its fair value?
Are you a potential investor? If you’ve been keeping an eye on AREX, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for AREX, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Approach Resources. You can find everything you need to know about AREX in the latest infographic research report. If you are no longer interested in Approach Resources, 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.