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Why Electrocomponents plc Could Be A Steal After Today’s Sharp Fall

FTSE100Shares in Electrocomponents (LSE: ECM) are down 6% at the time of writing after the company released a quarterly update that showed gross margins were lower than the market expected. This has led the market to question its current rating on the stock, as well as forecasts for the current year. However, now could be a great time to buy shares in the company. Here’s why.

Better Value

Clearly, the aim of all investors is to buy shares when they are low and sell them when they are high. However, what stops investors doing this most of the time is fear and greed. Fear when prices are low that they could go lower, and greed when prices are high because they think they may go higher.

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Indeed, shares are never low without reason. There is always a question mark either over the company’s performance or regarding the wider macroeconomic outlook. In Electrocomponents’ case, the question mark is regarding its gross margins. However, despite 2014 looking as though it could prove to be a slightly disappointing year, next year is forecast to be a different story, with earnings per share (EPS) set to increase by around 10%.

Despite strong growth prospects, Electrocomponents trades on a relatively attractive price to earnings (P/E) ratio of 14.9. While slightly higher than the FTSE 100, its growth rate is better and, furthermore, Electrocomponents currently yields a very attractive 4.8%, which is much higher than the FTSE 100’s yield of around 3.4%. Therefore, because of its sharp fall, Electrocomponents appears to offer great value for money.

Comparison Versus A Larger Sector Peer

While much larger, BT (LSE: BT-A) (NYSE: BT.US) sits in the same sector as Electrocomponents. While it trades on a lower P/E than Electrocomponents of 13.7, its forecast growth rate and yield are not quite as impressive as those of its sector peer. For instance, BT is expected to grow earnings by 8% next year (versus 10% for Electrocomponents) and shares in the company currently yield 3.3% (versus 4.8% for Electrocomponents).

Of course, that’s not to say that BT isn’t worth buying at current price levels. However, while under a certain amount of distress, Electrocomponents could prove to be something of a steal. If your intentions as an investor are to buy low, then Electrocomponents could fit the bill.

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Peter Stephens has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.

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