What Is H2O Innovation Inc.'s (TSE:HEO) Share Price Doing?

While H2O Innovation Inc. (TSE:HEO) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price movement on the TSX over the last few months, increasing to CA$2.55 at one point, and dropping to the lows of CA$1.90. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether H2O Innovation's current trading price of CA$2.04 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at H2O Innovation’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for H2O Innovation

What is H2O Innovation worth?

H2O Innovation is currently expensive based on my price multiple model, where I look at the company's price-to-earnings ratio in comparison 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 H2O Innovation’s ratio of 73.01x is above its peer average of 19.04x, which suggests the stock is trading at a higher price compared to the Machinery industry. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that H2O Innovation’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 another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will H2O Innovation generate?

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 more than double over the next couple of years, the future seems bright for H2O Innovation. 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 well and truly priced in HEO’s positive outlook, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe HEO 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 HEO 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 outlook is encouraging for HEO, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you want to dive deeper into H2O Innovation, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 3 warning signs with H2O Innovation, and understanding these should be part of your investment process.

If you are no longer interested in H2O Innovation, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.