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Leon's Furniture Limited (TSE:LNF), might not be a large cap stock, but it led the TSX gainers with a relatively large price hike in the past couple of weeks. The company is inching closer to its yearly highs following the recent share price climb. 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 examine Leon's Furniture’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
View our latest analysis for Leon's Furniture
What's The Opportunity In Leon's Furniture?
Good news, investors! Leon's Furniture is still a bargain right now according to our price multiple model, which compares the company's price-to-earnings ratio to the industry average. We’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 13.44x is currently well-below the industry average of 23.27x, meaning that it is trading at a cheaper price relative to its peers. Another thing to keep in mind is that Leon's Furniture’s share price is quite stable relative to the rest of the market, as indicated by its low beta. This means that if you believe the current share price should move towards its industry peers, a low beta could suggest it is not likely to reach that level anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range again.
Can we expect growth from Leon's Furniture?
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. Though in the case of Leon's Furniture, it is expected to deliver a negative earnings growth of -1.5%, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.
What This Means For You
Are you a shareholder? Although LNF is currently trading below the industry PE ratio, the negative profit outlook does bring on some uncertainty, which equates to higher risk. We recommend you think about whether you want to increase your portfolio exposure to LNF, or whether diversifying into another stock may be a better move for your total risk and return.