A market crash usually is the best time to buy good businesses, especially businesses that are usually too expensive or aggressively valued for a value investor’s taste. But that’s usually a very small window, and investors who are busy salvaging their losses by getting toxic assets off their portfolio might have liquidity but no inclination to buy businesses with relatively uncertain futures.
And as stocks start recovering, investors start getting more interested in them. But the more interest and capital investors pour into the market, the faster those once-affordable stocks climb towards an expensive valuation. That’s what happened to CAE (TSX:CAE)(NYSE:CAE), a once-heavily discounted stock is quite overvalued right now.
CAE started out as a manufacturer of simulation technologies. The Montreal-based company has been in business for over 70 years, and even though its primary focus is still flight simulators (civil aviation), the company has expanded its range to include healthcare and defence in the mix. Now, the company has over 160 training sites in over 35 countries.
One thing the company takes pride in is its ongoing relationship with its clients, which has resulted in over 60% of its revenues being generated from the recurring business. It still employs over 250 full-flight simulators and trains over 220,000 pilots every year.
In 2020, CAE stock saw one of the sharpest falls in the last two decades. The stock fell over 60% in less than two months, and it started its recovery journey in April 2020. It took the company the better part of 2020 to normalize and start its actual recovery. But since October 2020, the stock started climbing, and it has risen over 80% since then, almost reaching its pre-crash share price.
The problem that comes with this decent recovery is overvaluation. The stock is currently trading at a price-to-earnings ratio of 149 and a price-to-book ratio of 3.7 times. It might not be considered aggressively overvalued compared to some other growth stocks, but it is quite expensive. The best time to buy CAE would have been somewhere around the middle of 2020.
The company offers a five-year CAGR of 20.4%. If you consider its growth history before the crash, it’s easy to analyze that it’s CAE’s typical growth pace and not the exaggerated growth phase that many other companies went through after the crash recovery. It might be too late to buy CAE at an attractive valuation, but the price might still be worth the relatively reliable growth prospects that CAE offers for some value investors.
One of the primary reasons CAE crashed as hard as it did is because of its connection to the airline business, even though it’s relatively indirect. But now that the airline sector is recovering, things are expected to go even better for CAE. And if the company can expand its offerings to include training/developing guidance systems for autonomous delivery drones, it might be able to tap into a massive future market.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.