No one knows exactly how this Covid-19 tail may whip around and strike down HGH profits in the future. But I would argue you don't have to know this to build an investment case. I would argue the solution to investing in these circumstances is to do a 'Scenario Analysis'. That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. I have compiled three forecast scenarios: Scenario 1b, Scenario 2b and Scenario 3. I assess that the likelihood of each of these scenarios occurring in order is 30%, 50% and 20% (observant readers will notice these three relative probabilities add up to 100%).
So what happens when I combine my forecast from each scenario in those proportions?
FY2021 |
eps |
Probability |
Factored Earnings Contribution |
Scenario 1b |
8.6c |
30% |
2.58c |
Scenario 2b |
10.4c |
50% |
5.20c |
Scenario 3 |
14.8c |
20% |
2.96c |
Total |
|
100% |
10.7c |
FY2022 |
eps |
Probability |
Factored Earnings Contribution |
Scenario 1b |
7.7c |
30% |
2.31c |
Scenario 2b |
11.3c |
50% |
5.65c |
Scenario 3 |
20.1c |
20% |
4.02c |
Total |
|
100% |
12.0c |
Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.
FY2021: $1.07 to $1.28
FY2022: $1.20 to $1.44
With the share trading at $1.33 today, I would argue the share price has got ahead of itself and is now in the mid price range of FY2022 earnings projections. There are too many uncertainties about to justify buying in at this price now. I would like to increase my own stake in HGH further. But I am going to wait for a pull back in the share price before I do so.