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While Volex plc (LON:VLX) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price increase on the AIM over the last few months. As a small cap stock, hardly covered by any analysts, 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? Today I will analyse the most recent data on Volex’s outlook and valuation to see if the opportunity still exists.
What's the opportunity in Volex?
According to my valuation model, Volex seems to be fairly priced at around 7.33% above my intrinsic value, which means if you buy Volex today, you’d be paying a relatively reasonable price for it. And if you believe that the stock is really worth £2.93, then there isn’t really any room for the share price grow beyond what it’s currently trading. What's more, Volex’s share price may be more stable over time (relative to the market), as indicated by its low beta.
What kind of growth will Volex generate?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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. With revenues expected to grow by 43% over the next couple of years, the future seems bright for Volex. If the level of expenses is able to be maintained, it looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? It seems like the market has already priced in VLX’s positive outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at the stock? Will you have enough confidence to invest in the company should the price drop below its fair value?
Are you a potential investor? If you’ve been keeping an eye on VLX, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
If you want to dive deeper into Volex, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Volex has 1 warning sign and it would be unwise to ignore this.
If you are no longer interested in Volex, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
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.
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