At UK£0.80, Is It Time To Put Warpaint London PLC (LON:W7L) On Your Watch List?

Warpaint London PLC (LON:W7L), might not be a large cap stock, but it led the AIM gainers with a relatively large price hike in the past couple of weeks. As a small cap stock, hardly covered by any analysts, 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? Today I will analyse the most recent data on Warpaint London’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for Warpaint London

What's the opportunity in Warpaint London?

According to my valuation model, Warpaint London seems to be fairly priced at around 4.8% below my intrinsic value, which means if you buy Warpaint London today, you’d be paying a fair price for it. And if you believe the company’s true value is £0.84, then there’s not much of an upside to gain from mispricing. So, is there another chance to buy low in the future? Given that Warpaint London’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 Warpaint London?

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. However, with an expected decline of -1.9% in revenues over the next year, short term growth isn’t a driver for a buy decision for Warpaint London. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Currently, W7L appears to be trading around its fair value, 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 beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on the stock, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on W7L for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The stock appears to be trading at fair value, which 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 crystalize your views on W7L should the price fluctuate below its true value.

So while earnings quality is important, it's equally important to consider the risks facing Warpaint London at this point in time. Every company has risks, and we've spotted 5 warning signs for Warpaint London (of which 1 makes us a bit uncomfortable!) you should know about.

If you are no longer interested in Warpaint London, 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. 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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