Richelieu Hardware Ltd. (TSE:RCH), is not the largest company out there, but it saw a double-digit share price rise of over 10% in the past couple of months on the TSX. 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 Richelieu Hardware’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What's the opportunity in Richelieu Hardware?
According to my valuation model, Richelieu Hardware seems to be fairly priced at around 7.75% above my intrinsic value, which means if you buy Richelieu Hardware today, you’d be paying a relatively fair price for it. And if you believe that the stock is really worth CA$40.00, then there isn’t really any room for the share price grow beyond what it’s currently trading. Is there another opportunity to buy low in the future? Since Richelieu Hardware’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 Richelieu Hardware 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. 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 a relatively muted profit growth of 9.6% expected over the next couple of years, growth doesn’t seem like a key driver for a buy decision for Richelieu Hardware, at least in the short term.
What this means for you:
Are you a shareholder? It seems like the market has already priced in RCH’s future outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at the stock? 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 tabs on RCH, now may not be the most optimal time to buy, given it is trading around its fair value. However, the positive outlook means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
So while earnings quality is important, it's equally important to consider the risks facing Richelieu Hardware at this point in time. At Simply Wall St, we found 1 warning sign for Richelieu Hardware and we think they deserve your attention.
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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.
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