Adairs Limited (ASX:ADH), is not the largest company out there, but it led the ASX gainers with a relatively large price hike in the past couple of weeks. As a stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s examine Adairs’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

See our latest analysis for Adairs

What Is Adairs 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 Adairs’s ratio of 6.19x is trading slightly below its industry peers’ ratio of 10.53x, which means if you buy Adairs today, you’d be paying a decent price for it. And if you believe that Adairs should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Adairs’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

Can we expect growth from Adairs?

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. However, with a negative profit growth of -6.0% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Adairs. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Currently, ADH 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 beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on ADH, take a look at whether its fundamentals have changed.