HORNBACH Baumarkt AG (ETR:HBM), which is in the specialty retail business, and is based in Germany, received a lot of attention from a substantial price increase on the XTRA over the last few months. 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 HORNBACH Baumarkt’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

Check out our latest analysis for HORNBACH Baumarkt

What is HORNBACH Baumarkt 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 9.97x is currently trading slightly below its industry peers’ ratio of 10.3x, which means if you buy HORNBACH Baumarkt today, you’d be paying a decent price for it. And if you believe HORNBACH Baumarkt 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 HORNBACH Baumarkt’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 HORNBACH Baumarkt?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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. Though in the case of HORNBACH Baumarkt, it is expected to deliver a highly negative earnings growth in the next few years, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.

What this means for you:

Are you a shareholder? HBM 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 optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on HBM, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on HBM 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 crystallize your views on HBM should the price fluctuate below the industry PE ratio.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on HORNBACH Baumarkt. You can find everything you need to know about HORNBACH Baumarkt in the latest infographic research report. If you are no longer interested in HORNBACH Baumarkt, you can use our free platform to see my 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. 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. Thank you for reading.