Polar Power, Inc. (NASDAQ:POLA), which is in the electrical business, and is based in United States, saw a double-digit share price rise of over 10% in the past couple of months on the NASDAQCM. Less-covered, small caps sees 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 examine Polar Power’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What is Polar Power worth?
The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. 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 Polar Power’s ratio of 16.61x is trading slightly above its industry peers’ ratio of 14.69x, which means if you buy Polar Power today, you’d be paying a relatively reasonable price for it. And if you believe Polar Power 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 Polar Power’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.
What kind of growth will Polar Power generate?
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 -13% in revenues over the next year, short term growth isn’t a driver for a buy decision for Polar Power. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, POLA 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 reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on POLA, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping an eye on POLA for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, 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 POLA 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 Polar Power. You can find everything you need to know about Polar Power in the latest infographic research report. If you are no longer interested in Polar Power, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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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