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Home Federal Bancorp of Louisiana (NASDAQ:HFBL) shares have retraced a considerable in the last month. But plenty of shareholders will still be smiling, given that the stock is up 15% over the last quarter. Looking back over the last year, the stock has been a solid performer, with a gain of 21%.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock 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 Home Federal Bancorp of Louisiana Have A Relatively High Or Low P/E For Its Industry?
Home Federal Bancorp of Louisiana's P/E is 13.53. You can see in the image below that the average P/E (14.3) for companies in the mortgage industry is roughly the same as Home Federal Bancorp of Louisiana's P/E.
Home Federal Bancorp of Louisiana's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Home Federal Bancorp of Louisiana increased earnings per share by a whopping 30% last year. And its annual EPS growth rate over 5 years is 14%. With that performance, I would expect it to have an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Home Federal Bancorp of Louisiana's Balance Sheet
With net cash of US$31m, Home Federal Bancorp of Louisiana has a very strong balance sheet, which may be important for its business. Having said that, at 48% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Home Federal Bancorp of Louisiana's P/E Ratio
Home Federal Bancorp of Louisiana trades on a P/E ratio of 13.5, which is below the US market average of 18.5. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What can be absolutely certain is that the market has become less optimistic about Home Federal Bancorp of Louisiana over the last month, with the P/E ratio falling from 13.5 back then to 13.5 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Home Federal Bancorp of Louisiana. 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 firstname.lastname@example.org. 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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