Is Serica Energy PLC (LON:SQZ) Undervalued?
Serica Energy PLC (AIM:SQZ), an energy company based in United Kingdom, saw a significant share price rise of over 20% in the past couple of months on the AIM. Less-covered, small caps tend to present more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s take a look at Serica Energy’s outlook and value based on the most recent financial data to see if the opportunity still exists. Check out our latest analysis for Serica Energy
Is Serica Energy still cheap?
According to my relative valuation model, the stock seems to be currently fairly priced. I’ve used the price-to-equity ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 11.05x is currently trading slightly below its industry peers’ ratio of 14.46x, which means if you buy Serica Energy today, you’d be paying a reasonable price for it. And if you believe Serica Energy should be trading in this range, then there isn’t much room for the share price grow beyond what it’s currently trading. Furthermore, Serica Energy’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.
Can we expect growth from Serica Energy?
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 an expected decline of -8.70% in revenues over the next year, short term growth isn’t a driver for a buy decision for Serica Energy. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, SQZ appears to be trading around its fair value, 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 SQZ, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on SQZ for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The price seems to be trading at fair value, which 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 SQZ should the price fluctuate below its true value.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Serica Energy. You can find everything you need to know about Serica Energy in the latest infographic research report. If you are no longer interested in Serica Energy, 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.
