Medallion Financial Corp (NASDAQ:MFIN), a consumer finance company based in United States, led the NasdaqGS 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 Medallion Financial’s valuation and outlook in more detail to determine if there’s still a bargain opportunity. See our latest analysis for Medallion Financial
What is Medallion Financial worth?The stock seems fairly valued at the moment according to my relative valuation model. 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 0.48x 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.
Can we expect decent returns from Medallion Financial?Valuation is only one aspect of forming your investment views on Medallion Financial. Another thing to consider is whether it is actually a high-quality company. The best type of investment is always in a great company, producing robust returns at a cheap price. We can determine the quality of a stock many ways; one way is to look at how much return it generates relative to the money we’ve invested in the stock. 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 is currently trading at fair value, but the negative outlook does bring on some doubt around the future of the stock, 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 further examine 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.