While Dignity plc (LON:DTY) might not be the most widely known stock at the moment, it saw a significant share price rise of over 20% in the past couple of months on the LSE. 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 Dignity’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
View our latest analysis for Dignity
What's the opportunity in Dignity?
The stock seems fairly valued at the moment according to my valuation model. It’s trading around 14.60% above my intrinsic value, which means if you buy Dignity today, you’d be paying a relatively reasonable price for it. And if you believe the company’s true value is £5.89, then there isn’t really any room for the share price grow beyond what it’s currently trading. Although, there may be an opportunity to buy in the future. This is because Dignity’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.
Can we expect growth from Dignity?
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. However, with an expected decline of -14% in revenues over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Dignity. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, DTY 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 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 the stock, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on DTY for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The stock appears to be trading at fair value, which 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 DTY should the price fluctuate below its true value.