To the annoyance of some shareholders, Hamilton Beach Brands Holding (NYSE:HBB) shares are down a considerable 48% in the last month. And that drop will have no doubt have some shareholders concerned that the 62% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does Hamilton Beach Brands Holding Have A Relatively High Or Low P/E For Its Industry?
Hamilton Beach Brands Holding's P/E of 4.24 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Hamilton Beach Brands Holding has a lower P/E than the average (6.5) in the consumer durables industry classification.
This suggests that market participants think Hamilton Beach Brands Holding will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Hamilton Beach Brands Holding shrunk earnings per share by 7.6% last year. But EPS is up 4.9% over the last 5 years. And it has shrunk its earnings per share by 1.5% per year over the last three years. This growth rate might warrant a low P/E ratio. So it would be surprising to see a high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Hamilton Beach Brands Holding's Debt Impact Its P/E Ratio?
Net debt totals 54% of Hamilton Beach Brands Holding's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Hamilton Beach Brands Holding's P/E Ratio
Hamilton Beach Brands Holding trades on a P/E ratio of 4.2, which is below the US market average of 11.8. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. Given Hamilton Beach Brands Holding's P/E ratio has declined from 8.2 to 4.2 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Hamilton Beach Brands Holding. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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