Slate Retail REIT (TSE:SRT.UN), which is in the reits business, and is based in Canada, led the TSX gainers with a relatively large price hike in the past couple of weeks. As a small cap stock, which tends to lack high analyst coverage, 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 take a look at Slate Retail REIT’s outlook and value based on the most recent financial data to see if the opportunity still exists.
What is Slate Retail REIT worth?
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 Slate Retail REIT’s ratio of 8.82x is trading slightly above its industry peers’ ratio of 6.32x, which means if you buy Slate Retail REIT today, you’d be paying a relatively sensible price for it. And if you believe Slate Retail REIT should be trading in this range, then there isn’t really any room for the share price grow beyond the levels of other industry peers over the long-term. Although, there may be an opportunity to buy in the future. This is because Slate Retail REIT’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, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
Can we expect growth from Slate Retail REIT?
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. However, with an expected decline of -6.5% in revenues over the next year, short term growth isn’t a driver for a buy decision for Slate Retail REIT. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, SRT.UN appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on SRT.UN, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on SRT.UN 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 SRT.UN should the price fluctuate below the industry PE ratio.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Slate Retail REIT. You can find everything you need to know about Slate Retail REIT in the latest infographic research report. If you are no longer interested in Slate Retail REIT, you can use our free platform to see my 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. 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. Thank you for reading.