Thinking of buying the IQE and Xaar share prices after recent falls? Read this first

IQE plc (LON: IQE) and Xaar plc (LON: XAR) could experience further share price declines in the near term.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

How I’d invest in UK dividend stocks to generate passive income for retirement

How I plan use the iShares UK dividend fund to invest in high-yield stocks in the UK to generate passive…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

GSK shares plummet 15% in a week! What’s going on here?

GSK shares had a bad time last week. They're down 15% as investors' sentiment soured ahead of litigation proceedings in…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Stock market recovery: have all the bubbles now burst?

Asset bubbles keep on coming, and here's what I'm doing to navigate through them and invest for the stock market…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

UK shares can offer a lucrative path for passive income. Our writer considers a plan to double his State Pension.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 of the best shares to buy now with £2,000

I reckon the best shares to buy now have strong growth in earnings and recent good news flow, such as…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m aiming for £500 a month in income from dividend stocks 

Here's my three-step plan for achieving a growing income from dividend stocks and three companies I'd use to help execute…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »