Is There Now An Opportunity In São Carlos Empreendimentos e Participações S.A. (BVMF:SCAR3)?

São Carlos Empreendimentos e Participações S.A. (BVMF:SCAR3), 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 BOVESPA. Less-covered, small caps sees 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? Let’s take a look at São Carlos Empreendimentos e Participações’s outlook and value based on the most recent financial data to see if the opportunity still exists.

View our latest analysis for São Carlos Empreendimentos e Participações

Is São Carlos Empreendimentos e Participações still cheap?

According to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average, the stock currently looks expensive. 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 28.84x is above its peer average of 23.61x, which suggests the stock is trading at a higher price compared to the Real Estate industry. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Since São Carlos Empreendimentos e Participações’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future, giving us another chance to invest. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

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. However, with a relatively muted profit growth of 3.1% expected over the next year, growth doesn’t seem like a key driver for a buy decision for São Carlos Empreendimentos e Participações, at least in the short term.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in SCAR3’s outlook, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe SCAR3 should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on SCAR3 for some time, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive growth outlook may mean it’s worth diving deeper into other factors 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 São Carlos Empreendimentos e Participações at this point in time. Case in point: We've spotted 2 warning signs for São Carlos Empreendimentos e Participações you should be mindful of and 1 of these is potentially serious.

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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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