Is There Now An Opportunity In TCL Electronics Holdings Limited (HKG:1070)?

TCL Electronics Holdings Limited (HKG:1070), might not be a large cap stock, but it led the SEHK 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? Let’s examine TCL Electronics Holdings’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

Check out our latest analysis for TCL Electronics Holdings

What is TCL Electronics Holdings worth?

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 8.49x is currently trading slightly above its industry peers’ ratio of 8.19x, which means if you buy TCL Electronics Holdings today, you’d be paying a relatively sensible price for it. And if you believe that TCL Electronics Holdings should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Furthermore, TCL Electronics Holdings’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.

What kind of growth will TCL Electronics Holdings 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. Though in the case of TCL Electronics Holdings, it is expected to deliver a negative earnings growth of -3.5%, 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? 1070 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 de-risk 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 1070, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on 1070 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. In addition to this, 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 gel your views on 1070 should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing TCL Electronics Holdings at this point in time. Case in point: We've spotted 5 warning signs for TCL Electronics Holdings you should be mindful of and 1 of them doesn't sit too well with us.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.