The share prices of IQE (LSE: IQE) and Xaar (LSE: XAR) have disappointed of late. The former’s share price has fallen by 28% in the last year, while the latter released a profit warning on Thursday, which sent its shares around 30% lower.
Clearly, there could be greater value investing appeal on offer after their share price falls. However, the two stocks could experience further falls in the short run due to weak investor sentiment. As such, is now the right time to buy them for the long term?
Profit warning
Industrial inkjet technology specialist Xaar’s profit warning on Thursday showed that the company continues to face a difficult outlook.
Revenue for the first half of the 2018 financial year is expected to be £35m, which includes £9.8m of one-off royalties. Underlying trading since the end of June has been worse than expected by the company. Adoption of the 1201 printhead has been substantially slower than anticipated. Alongside a high rate of decline in ceramics, this has offset the positive reception of new products.
In response to the challenges it is facing, the company is undertaking a review of strategic options for more extensive partnering in the printhead business unit. However, the reality is that the stock could experience further share price weakness following its recent fall. Investors may take time to digest the profit warning, and this could lead to additional paper losses for existing investors in the short run.
While Xaar has the potential to deliver a successful turnaround, it may be prudent for investors to await positive news from the company. As such, now does not appear to be the right time to buy it, with its risk/reward ratio being relatively unfavourable.
Turnaround potential
The performance of the IQE share price has also been disappointing. It has fallen by 28% in the last year, with investors seemingly less interested in the company’s long-term growth prospects than they were in previous years.
Of course, the company’s performance continues to be relatively strong. A recent update showed that IQE is making good progress with its overall strategy, and that it is delivering strong profit growth on an underlying basis. This is expected to lead to growth in earnings of 6% in the current year, followed by further growth of 32% next year. This puts the stock on a price-to-earnings growth (PEG) ratio of 0.7, which suggests that it offers a wide margin of safety following its recent stock price fall.
Although there is the possibility of further declines in IQE’s valuation in the near term, the company’s long-term growth potential appears to be sound. Therefore, for investors who can live with heightened volatility and the realistic prospect of further paper losses in return for what seems to be a favourable risk/reward ratio, now could be the perfect time to buy the stock for the long term.
