Is There Now An Opportunity In H2O Innovation Inc. (CVE:HEO)?

While H2O Innovation Inc. (CVE:HEO) might not be the most widely known stock at the moment, it saw a double-digit share price rise of over 10% in the past couple of months on the TSXV. As a stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s take a look at H2O Innovation’s outlook and value based on the most recent financial data to see if the opportunity still exists.

View our latest analysis for H2O Innovation

What's the opportunity in H2O Innovation?

According to my valuation model, the stock is currently overvalued by about 20%, trading at CA$2.49 compared to my intrinsic value of CA$2.07. This means that the buying opportunity has probably disappeared for now. But, is there another opportunity to buy low 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. 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. With revenues expected to grow by a double-digit 23% over the next couple of years, the outlook is positive for H2O Innovation. If the level of expenses is able to be maintained, 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? HEO’s optimistic future growth appears to have been factored into the current share price, with shares trading above its fair value. At this current price, shareholders may be asking a different question – should I sell? If you believe HEO should trade below its current price, selling high and buying it back up again when its price falls towards its real value 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 an eye on HEO for a while, now may not be the best time to enter into the stock. The price has surpassed its true value, which means there’s no upside from mispricing. However, the optimistic prospect is encouraging for HEO, which means 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 H2O Innovation at this point in time. While conducting our analysis, we found that H2O Innovation has 2 warning signs and it would be unwise to ignore these.

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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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