Should You Think About Buying Sleep Country Canada Holdings Inc. (TSE:ZZZ) Now?

Sleep Country Canada Holdings Inc. (TSE:ZZZ), might not be a large cap stock, but it received a lot of attention from a substantial price movement on the TSX over the last few months, increasing to CA$39.48 at one point, and dropping to the lows of CA$26.94. 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 Sleep Country Canada Holdings' current trading price of CA$27.52 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 Sleep Country Canada Holdings’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 Sleep Country Canada Holdings

What's the opportunity in Sleep Country Canada Holdings?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 11.42x is currently trading slightly above its industry peers’ ratio of 10.05x, which means if you buy Sleep Country Canada Holdings today, you’d be paying a relatively reasonable price for it. And if you believe Sleep Country Canada Holdings 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 Sleep Country Canada Holdings’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 Sleep Country Canada Holdings?

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. 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 grow by 36% over the next couple of years, the future seems bright for Sleep Country Canada Holdings. 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 already priced in ZZZ’s positive outlook, 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 ZZZ? 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 tabs on ZZZ, 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 ZZZ, 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.

So while earnings quality is important, it's equally important to consider the risks facing Sleep Country Canada Holdings at this point in time. While conducting our analysis, we found that Sleep Country Canada Holdings 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. 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.