At UK£2.75, Is Volex plc (LON:VLX) Worth Looking At Closely?

Volex plc (LON:VLX), might not be a large cap stock, but it received a lot of attention from a substantial price increase on the AIM over the last few months. Less-covered, small caps tend to present more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s take a look at Volex’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Volex

What is Volex worth?

According to my valuation model, Volex seems to be fairly priced at around 1.31% above my intrinsic value, which means if you buy Volex today, you’d be paying a relatively reasonable price for it. And if you believe the company’s true value is £2.71, there’s only an insignificant downside when the price falls to its real value. Is there another opportunity to buy low in the future? Since Volex’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What kind of growth will Volex generate?

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. In Volex's case, its revenues over the next few years are expected to grow by 43%, indicating a highly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? It seems like the market has already priced in VLX’s positive outlook, with shares trading around its fair value. 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 the stock? Will you have enough confidence to invest in the company should the price drop below its fair value?

Are you a potential investor? If you’ve been keeping tabs on VLX, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, 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 Volex at this point in time. Case in point: We've spotted 2 warning signs for Volex you should be aware of.

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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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