At AU$0.83, Is It Time To Put Reckon Limited (ASX:RKN) On Your Watch List?

While Reckon Limited (ASX:RKN) might not be the most widely known stock at the moment, it saw a decent share price growth in the teens level on the ASX over the last few months. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s examine Reckon’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for Reckon

What's the opportunity in Reckon?

Good news, investors! Reckon is still a bargain right now according to my price multiple model, which compares 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 Reckon’s ratio of 11.55x is below its peer average of 32.97x, which indicates the stock is trading at a lower price compared to the Software industry. What’s more interesting is that, Reckon’s share price is quite stable, which could mean two things: firstly, it may take the share price a while to move closer to its industry peers, and secondly, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta.

Can we expect growth from Reckon?

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 relatively muted profit growth of 1.7% expected over the next couple of years, growth doesn’t seem like a key driver for a buy decision for Reckon, at least in the short term.

What this means for you:

Are you a shareholder? Even though growth is relatively muted, since RKN is currently trading below the industry PE ratio, it may be a great time to accumulate more of your holdings in the stock. However, there are also other factors such as financial health to consider, which could explain the current price multiple.

Are you a potential investor? If you’ve been keeping an eye on RKN for a while, now might be the time to enter the stock. Its future profit outlook isn’t fully reflected in the current share price yet, which means it’s not too late to buy RKN. But before you make any investment decisions, consider other factors such as the track record of its management team, in order to make a well-informed assessment.

So while earnings quality is important, it's equally important to consider the risks facing Reckon at this point in time. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Reckon.

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This article by Simply Wall St is general in nature. 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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