Medallion Financial Corp (NASDAQ:MFIN), a consumer finance company based in United States, received a lot of attention from a substantial price increase on the NasdaqGS over the last few months. 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 take a look at Medallion Financial’s outlook and value based on the most recent financial data to see if the opportunity still exists. Check out our latest analysis for Medallion Financial
Is Medallion Financial still cheap?According to my relative valuation model, the stock seems to be currently fairly priced. I’ve used the price-to-book ratio in this instance because there’s not enough visibility to forecast its cash flows, and its earnings doesn’t seem to reflect its true value. The stock’s ratio of 0.51x is currently trading slightly below its industry peers’ ratio of 1.78x, which means if you buy Medallion Financial today, you’d be paying a relatively reasonable price for it. And if you believe that Medallion Financial should be trading at this level in the long run, 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 Medallion Financial’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.
What kind of returns can we expect from Medallion Financial in the future?What kind of returns can we expect from Medallion Financial in the future? It’s one thing to get a stock at a low price, but the quality of the company is even more important, as its stock may be cheap or expensive for a reason. A way to assess stock quality is by looking how much it returns to you as the investor compared to how much you’re invested. Given that Medallion Financial is expected to be loss-making in the upcoming year, you can expect a negative return on your investment over this time. Not a very compelling case to buy right now given the uncertainty around profitability.
What this means for you:
Are you a shareholder? MFIN appears to be trading at fair value, but the negative outlook does bring on some uncertainty, which equates to higher risk. Now may not be the best time to boost your holding in MFIN. Consider whether you want to increase your portfolio exposure to MFIN, or whether diversifying into another stock may be a better move for your total risk and return.
Are you a potential investor? If you’ve been keeping tabs on MFIN for a while, but hesitant on making the leap, I recommend you dig deeper into the stock. Research more to see if the negative return is justified, for example, is the company going through a reinvestment period? And keep in mind the risks that come with negative earnings in the future.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Medallion Financial. You can find everything you need to know about Medallion Financial in the latest infographic research report. If you are no longer interested in Medallion Financial, you can use our free platform to see my list of over 50 other stocks with a high growth potential.