Should You Think About Buying Slater and Gordon Limited (ASX:SGH) Now?

By
Simply Wall St
Published
August 29, 2021
ASX:SGH
Source: Shutterstock

Slater and Gordon Limited (ASX:SGH), 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 ASX. Less-covered, small caps tend to present more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Today I will analyse the most recent data on Slater and Gordon’s outlook and valuation to see if the opportunity still exists.

Check out our latest analysis for Slater and Gordon

What's the opportunity in Slater and Gordon?

The stock seems fairly valued at the moment according to my valuation model. It’s trading around 15% below my intrinsic value, which means if you buy Slater and Gordon today, you’d be paying a reasonable price for it. And if you believe that the stock is really worth A$1.00, then there’s not much of an upside to gain from mispricing. Furthermore, Slater and Gordon’s low beta implies that the stock is less volatile than the wider market.

What does the future of Slater and Gordon look like?

earnings-and-revenue-growth
ASX:SGH Earnings and Revenue Growth August 30th 2021

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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. Though in the case of Slater and Gordon, it is expected to deliver a relatively unexciting earnings growth of 4.3%, which doesn’t help build up its investment thesis. Growth doesn’t appear to be a main reason for a buy decision for the company, at least in the near term.

What this means for you:

Are you a shareholder? SGH’s future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at the stock? Will you have enough conviction to buy should the price fluctuates below the true value?

Are you a potential investor? If you’ve been keeping tabs on SGH, now may not be the most advantageous time to buy, given it is trading around its fair value. However, the positive outlook means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing Slater and Gordon at this point in time. To help with this, we've discovered 2 warning signs (1 makes us a bit uncomfortable!) that you ought to be aware of before buying any shares in Slater and Gordon.

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