While Citi Trends, Inc. (NASDAQ:CTRN) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price movement on the NASDAQGS over the last few months, increasing to US$107 at one point, and dropping to the lows of US$71.92. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Citi Trends' current trading price of US$71.92 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Citi Trends’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
What is Citi Trends 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 9.53x is currently trading slightly below its industry peers’ ratio of 13.49x, which means if you buy Citi Trends today, you’d be paying a decent price for it. And if you believe Citi Trends should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. Although, there may be an opportunity to buy in the future. This is because Citi Trends’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
Can we expect growth from Citi Trends?
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 Citi Trends, at least in the near future.
What this means for you:
Are you a shareholder? CTRN 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 CTRN, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping an eye on CTRN 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 CTRN should the price fluctuate below the industry PE ratio.
In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. When we did our research, we found 3 warning signs for Citi Trends (1 shouldn't be ignored!) that we believe deserve your full attention.
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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.
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