At US$70.02, Is Danaos Corporation (NYSE:DAC) Worth Looking At Closely?

While Danaos Corporation (NYSE:DAC) might not be the most widely known stock at the moment, it led the NYSE gainers with a relatively large price hike in the past couple of weeks. As a small cap stock, which tends to lack high analyst coverage, 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 Danaos’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for Danaos

Is Danaos 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. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Danaos’s ratio of 1.99x is trading slightly below its industry peers’ ratio of 2.07x, which means if you buy Danaos today, you’d be paying a reasonable price for it. And if you believe Danaos 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. Is there another opportunity to buy low in the future? Since Danaos’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 kind of growth will Danaos 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. However, with a negative profit growth of -12% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Danaos. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? DAC 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 DAC, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on DAC for a while, now may not be the most advantageous 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 crystallize your views on DAC should the price fluctuate below the industry PE ratio.

If you want to dive deeper into Danaos, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Danaos you should know about.

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

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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.