DV Resources Ltd (TSXV:DLV.H), a CADCA$6.80M small-cap, is a metals and mining operating in an industry which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Moreover, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for metal products may also decrease. Basic material analysts are forecasting for the entire industry, a positive double-digit growth of 25.66% in the upcoming year , and a massive growth of 64.14% over the next couple of years. This rate is larger than the growth rate of the Canadian stock market as a whole. Should your portfolio be overweight in the metals and mining sector at the moment? In this article, I’ll take you through the sector growth expectations, and also determine whether DLV.H is a laggard or leader relative to its basic materials sector peers. See our latest analysis for DLV.H
What’s the catalyst for DLV.H’s sector growth?
Altogether the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be vastly competitive and consolidation seems to be a inevitable. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. Over the past year, the industry saw growth of over 50%, beating the Canadian market growth of 8.26%. DLV.H lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its metals and mining peers. As the company trails the rest of the industry in terms of growth, DLV.H may also be a cheaper stock relative to its peers.
Is DLV.H and the sector relatively cheap?
The metals and mining sector’s PE is currently hovering around 11x, below the broader Canadian stock market PE of 17x. 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 8.60% on equities compared to the market’s 9.62%. Since DLV.H’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge DLV.H’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? DLV.H has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of DLV.H, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how DLV.H fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If DLV.H 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 metals and mining 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 DLV.H’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into DV Resources’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.