Should You Think About Buying Hotel Chocolat Group Plc (LON:HOTC) Now?

Hotel Chocolat Group Plc (LON:HOTC), is not the largest company out there, but it saw a significant share price rise of over 20% in the past couple of months on the AIM. 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? Today I will analyse the most recent data on Hotel Chocolat Group’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for Hotel Chocolat Group

Is Hotel Chocolat Group still cheap?

Hotel Chocolat Group appears to be expensive according to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and 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 Hotel Chocolat Group’s ratio of 32.03x is above its peer average of 14.64x, which suggests the stock is trading at a higher price compared to the Food industry. But, is there another opportunity to buy low in the future? Since Hotel Chocolat Group’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future, giving us another chance to invest. 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 Hotel Chocolat Group generate?

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Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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 relatively muted profit growth of 9.8% expected over the next couple of years, growth doesn’t seem like a key driver for a buy decision for Hotel Chocolat Group, at least in the short term.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in HOTC’s outlook, with shares trading above industry price multiples. At this current price, shareholders may be asking a different question – should I sell? If you believe HOTC should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio 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 HOTC 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 positive growth outlook may mean it’s worth diving deeper into other factors in order to take advantage of the next price drop.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Hotel Chocolat Group, and understanding this should be part of your investment process.

If you are no longer interested in Hotel Chocolat Group, 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. 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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