At R$38.95, Is It Time To Put São Carlos Empreendimentos e Participações S.A. (BVMF:SCAR3) On Your Watch List?

São Carlos Empreendimentos e Participações S.A. (BVMF:SCAR3), might not be a large cap stock, but it led the BOVESPA gainers with a relatively large price hike in the past couple of weeks. 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 São Carlos Empreendimentos e Participações’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for São Carlos Empreendimentos e Participações

What's the opportunity in São Carlos Empreendimentos e Participações?

The share price seems sensible at the moment according to my price multiple model, where I compare 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 São Carlos Empreendimentos e Participações’s ratio of 25.22x is trading slightly above its industry peers’ ratio of 23.57x, which means if you buy São Carlos Empreendimentos e Participações today, you’d be paying a relatively reasonable price for it. And if you believe that São Carlos Empreendimentos e Participações should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. So, is there another chance to buy low in the future? Given that São Carlos Empreendimentos e Participações’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of São Carlos Empreendimentos e Participações look like?

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. With profit expected to grow by a double-digit 11% in the upcoming year, the short-term outlook is positive for São Carlos Empreendimentos e Participações. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has already priced in SCAR3’s positive outlook, with shares trading around industry price multiples. 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 SCAR3? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

Are you a potential investor? If you’ve been keeping an eye on SCAR3, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the optimistic forecast is encouraging for SCAR3, which 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.

If you'd like to know more about São Carlos Empreendimentos e Participações as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for São Carlos Empreendimentos e Participações (2 are a bit concerning) you should be familiar with.

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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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