What Does Kirkland's, Inc.'s (NASDAQ:KIRK) Share Price Indicate?
While Kirkland's, Inc. (NASDAQ:KIRK) might not be the most widely known stock at the moment, it saw a significant share price rise of over 20% in the past couple of months on the NASDAQGS. 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 Kirkland's’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
Check out our latest analysis for Kirkland's
What's the opportunity in Kirkland's?
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 Kirkland's’s ratio of 8.41x is trading slightly below its industry peers’ ratio of 9.91x, which means if you buy Kirkland's today, you’d be paying a decent price for it. And if you believe that Kirkland's should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Kirkland's’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 growth will Kirkland's 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 -2.7% expected next year, near-term growth certainly doesn’t appear to be a driver for a buy decision for Kirkland's. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? KIRK 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 reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on KIRK, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping an eye on KIRK 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. Furthermore, 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 KIRK should the price fluctuate below the industry PE ratio.
So while earnings quality is important, it's equally important to consider the risks facing Kirkland's at this point in time. At Simply Wall St, we found 1 warning sign for Kirkland's and we think they deserve your attention.
If you are no longer interested in Kirkland's, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
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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