Should You Be Tempted To Buy Halcón Resources Corporation (NYSE:HK) Because Of Its PE Ratio?
Halcón Resources Corporation (NYSE:HK) trades with a trailing P/E of 1.1x, which is lower than the industry average of 13.2x. While HK might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Halcón Resources
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for HK
Price-Earnings Ratio = Price per share ÷ Earnings per share
HK Price-Earnings Ratio = $6.4 ÷ $5.963 = 1.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as HK, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 1.1x, HK’s P/E is lower than its industry peers (13.2x). This implies that investors are undervaluing each dollar of HK’s earnings. As such, our analysis shows that HK represents an under-priced stock.
A few caveats
Before you jump to the conclusion that HK is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to HK, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with HK, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing HK to are fairly valued by the market. If this does not hold, there is a possibility that HK’s P/E is lower because our peer group is overvalued by the market.
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.
