A O Smith Corporation (NYSE:AOS), which is in the building business, and is based in United States, saw significant share price volatility over the past couple of months on the NYSE, rising to the highs of $60.63 and falling to the lows of $42.28. This high level of volatility gives investors the opportunity to enter into the stock, and potentially buy at an artificially low price. A question to answer is whether A. O. Smith’s current trading price of $45.76 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at A. O. Smith’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

Check out our latest analysis for A. O. Smith

What’s the opportunity in A. O. Smith?

A. O. Smith appears to be overvalued according to my relative valuation model. 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 A. O. Smith’s ratio of 23.01x is above its peer average of 15.41x, which suggests the stock is overvalued compared to the Building industry. But, is there another opportunity to buy low in the future? Given that A. O. Smith’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 another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of A. O. Smith look like?

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. A. O. Smith’s earnings over the next few years are expected to increase by 49%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in AOS’s positive outlook, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe AOS should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on AOS for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for AOS, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on A. O. Smith. You can find everything you need to know about A. O. Smith in the latest infographic research report. If you are no longer interested in A. O. Smith, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.