City of London Group plc (AIM:CIN), a GBP£34.73M small-cap, operates in the financial services industry, which tends to be appealing to risk-averse investors attracted to steady revenues, low volatility and high dividend yields. Financial services analysts are forecasting for the entire industry, a strong double-digit growth of 13.34% in the upcoming year , and a whopping growth of 30.83% over the next couple of years. However this rate still came in below the growth rate of the UK stock market as a whole. Today, I’ll take you through the sector growth expectations, and also determine whether CIN is a laggard or leader relative to its financial sector peers. See our latest analysis for CIN
What’s the catalyst for CIN’s sector growth?
Recently, government and overseas regulators involvement has increased to play a prominent role, closely examining and controlling day-to-day business administration of certain companies. Over the past year, the industry saw growth of 3.84%, though still underperforming the wider UK stock market. CIN lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means CIN may be trading cheaper than its peers.
Is CIN and the sector relatively cheap?
The financial services sector’s PE is currently hovering around 13x, lower than the rest of the UK stock market PE of 19x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry returned a similar 11.52% on equities compared to the market’s 12.78%. Since CIN’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge CIN’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? CIN has been a financial services industry laggard in the past year. If your initial investment thesis is around the growth prospects of CIN, there are other financial services companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how CIN fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If CIN has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its financial services peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at CIN’s future cash flows in order to assess whether the stock is trading at a reasonable price.