What Does Neo Performance Materials Inc.'s (TSE:NEO) Share Price Indicate?

Neo Performance Materials Inc. (TSE:NEO), might not be a large cap stock, but it saw a significant share price rise of over 20% in the past couple of months on the TSX. 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? Today I will analyse the most recent data on Neo Performance Materials’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for Neo Performance Materials

What's The Opportunity In Neo Performance Materials?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. 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 Neo Performance Materials’s ratio of 8.69x is trading in-line with its industry peers’ ratio, which means if you buy Neo Performance Materials today, you’d be paying a relatively sensible price for it. Is there another opportunity to buy low in the future? Since Neo Performance Materials’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Neo Performance Materials look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with a negative profit growth of -6.9% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Neo Performance Materials. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Currently, NEO 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 de-risk 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 NEO, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on NEO for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, 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 NEO should the price fluctuate below the industry PE ratio.

So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with Neo Performance Materials (including 2 which are a bit unpleasant).

If you are no longer interested in Neo Performance Materials, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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