Signature Resources Ltd (TSXV:SGU), a CADCA$5.46M small-cap, operates in the basic materials industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Furthermore, 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 strong double-digit growth of 25.66% in the upcoming year , and an enormous 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, as well as evaluate whether SGU is lagging or leading its competitors in the industry. View our latest analysis for Signature Resources
What’s the catalyst for SGU’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 natural trend. 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. In the previous year, the industry saw growth of over 50%, beating the Canadian market growth of 8.26%. SGU 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 SGU may be trading cheaper than its peers.
Is SGU and the sector relatively cheap?
The metals and mining industry is trading at a PE ratio of 11x, lower than the rest of the 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 SGU’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SGU’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SGU has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of SGU, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how SGU fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If SGU 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 SGU’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Signature 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.