Is Now The Time To Look At Buying ENCE Energía y Celulosa, S.A. (BME:ENC)?

ENCE Energía y Celulosa, S.A. (BME:ENC), might not be a large cap stock, but it saw a significant share price rise of over 20% in the past couple of months on the BME. With many analysts covering the stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, could the stock still be trading at a relatively cheap price? Let’s examine ENCE Energía y Celulosa’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

Check out our latest analysis for ENCE Energía y Celulosa

What Is ENCE Energía y Celulosa 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 ENCE Energía y Celulosa’s ratio of 3.75x is trading slightly below its industry peers’ ratio of 6.58x, which means if you buy ENCE Energía y Celulosa today, you’d be paying a reasonable price for it. And if you believe that ENCE Energía y Celulosa should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. Although, there may be an opportunity to buy in the future. This is because ENCE Energía y Celulosa’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.

What kind of growth will ENCE Energía y Celulosa 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. Though in the case of ENCE Energía y Celulosa, it is expected to deliver a highly negative earnings growth in the next few years, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.

What This Means For You

Are you a shareholder? Currently, ENC appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on ENC, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on ENC for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on ENC should the price fluctuate below the industry PE ratio.

So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. When we did our research, we found 4 warning signs for ENCE Energía y Celulosa (2 are significant!) that we believe deserve your full attention.

If you are no longer interested in ENCE Energía y Celulosa, 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.