Stock Analysis

At CA$10.72, Is It Time To Put Neo Performance Materials Inc. (TSE:NEO) On Your Watch List?

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TSX:NEO
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Neo Performance Materials Inc. (TSE:NEO), might not be a large cap stock, but it led the TSX gainers with a relatively large price hike in the past couple of weeks. 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, what if the stock is still a bargain? Let’s examine Neo Performance Materials’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

See our latest analysis for Neo Performance Materials

What Is Neo Performance Materials Worth?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. 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 Neo Performance Materials’s ratio of 8.95x is trading slightly above its industry peers’ ratio of 7.12x, which means if you buy Neo Performance Materials today, you’d be paying a relatively sensible price for it. And if you believe Neo Performance Materials should be trading in this range, then there isn’t really any room for the share price grow beyond the levels of other industry peers over the long-term. So, is there another chance to buy low in the future? Given that Neo Performance Materials’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.

Can we expect growth from Neo Performance Materials?

earnings-and-revenue-growth
TSX:NEO Earnings and Revenue Growth December 6th 2022

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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 profit expected to grow by 56% over the next couple of years, the future seems bright for Neo Performance Materials. 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? NEO’s optimistic future growth appears to have been factored into the current share price, 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 NEO? Will you have enough conviction to buy should the price fluctuate below the industry PE ratio?

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

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with Neo Performance Materials, and understanding these should be part of your investment process.

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

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