Continental Gold Inc (TSX:CNL), a metals and mining company based in Canada, saw a significant share price rise of over 20% in the past couple of months on the TSX. As a small cap stock, which tends to lack high analyst coverage, 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 Continental Gold’s valuation and outlook in more detail to determine if there’s still a bargain opportunity. View our latest analysis for Continental Gold
What’s the opportunity in Continental Gold?According to my relative valuation model, the stock seems to be currently fairly priced. In this instance, I’ve used the price-to-book (PB) ratio given that there is not enough information to reliably forecast the stock’s cash flows, and its earnings doesn’t seem to reflect its true value. I find that Continental Gold’s ratio of 1.39x is trading slightly above its industry peers’ ratio of 1.09x, which means if you buy Continental Gold today, you’d be paying a relatively fair price for it. And if you believe that Continental Gold should be trading at this level in the long run, there’s only an insignificant downside when the price falls to its real value. Although, there may be an opportunity to buy in the future. This is because Continental Gold’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
Can we expect decent returns from Continental Gold?Valuation is only one aspect of forming your investment views on Continental Gold. Another thing to consider is whether it is actually a high-quality company. The best type of investment is always in a great company, producing robust returns at a cheap price. A way to assess stock quality is by looking how much it returns to you as the investor compared to how much you’re invested. Given that Continental Gold is expected to be loss-making over the next couple of years, you can expect a negative return on your investment over this period of time. Not a very compelling case to buy right now given the uncertainty around profitability.
What this means for you:
Are you a shareholder? CNL appears to be trading at fair value, but the negative outlook does bring on some doubt around the future of the stock, which equates to higher risk. Now may not be the best time to boost your holding in CNL. Consider whether you want to increase your portfolio exposure to CNL, or whether diversifying into another stock may be a better move for your total risk and return.
Are you a potential investor? If you’ve been keeping tabs on CNL for a while, but hesitant on making the leap, I recommend you dig deeper into the stock. Research more to see if the negative return is justified, for example, is the company going through a reinvestment period? And keep in mind the risks that come with negative earnings in the future.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Continental Gold. You can find everything you need to know about Continental Gold in the latest infographic research report. If you are no longer interested in Continental Gold, you can use our free platform to see my list of over 50 other stocks with a high growth potential.