Stock Analysis

At UK£1.40, Is Shoe Zone plc (LON:SHOE) Worth Looking At Closely?

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AIM:SHOE
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Shoe Zone plc (LON:SHOE), 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 AIM. 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 Shoe Zone’s outlook and value based on the most recent financial data to see if the opportunity still exists.

Check out our latest analysis for Shoe Zone

Is Shoe Zone still cheap?

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 9.98x is currently trading slightly below its industry peers’ ratio of 12.26x, which means if you buy Shoe Zone today, you’d be paying a decent price for it. And if you believe that Shoe Zone 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. Is there another opportunity to buy low in the future? Since Shoe Zone’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 does the future of Shoe Zone look like?

earnings-and-revenue-growth
AIM:SHOE Earnings and Revenue Growth January 14th 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. 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 extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Shoe Zone, at least in the near future.

What this means for you:

Are you a shareholder? SHOE seems priced close to industry peers right now, 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 SHOE, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on SHOE for a while, now may not be the most optimal 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 SHOE should the price fluctuate below the industry PE ratio.

If you'd like to know more about Shoe Zone as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Shoe Zone (including 1 which is potentially serious).

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

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