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A Growth Stock That May Skyrocket Into the Exosphere in 2019

I don’t know why, but investors seem to have a love/hate relationship with Stars Group (TSX:TSGI)(NASDAQ:TSG), a high-flying gambling stock that’s endured massive booms and busts over the last few years.

There’s been no shortage of drama with Stars Group, and although the growth stock appears to be a gamble itself due to the erratic movements in the long-term stock chart, I’d encourage investors to have a look at the fundamentals and the incredible value there is to be had now that most of the weak-handed investors have sold and moved on from a name that I believe could surprise us all.

Why’s the stock been punished so severely?

Rising operating expenses, shareholder-dilutive activities, and poorly integrated acquisitions have been a drag on the stock in spite of the brightened global outlook for the online gambling industry.

Last August, fellow Fool contributor David Jagielski conducted a forensic analysis of the damage that had been done to Stars Group stock, noting the inefficiencies as the main risk that investors would need to endure if they were to pick up shares after its fall from glory.

“The biggest concern that I would have about Stars Group and its recent results would be how much work the company still has to do to clean up any inefficiency as a result of its recent acquisitions.” said Jagielski. “The danger with expanding is that a company picks up inefficiencies along the way, and it’ll take time to eliminate those. However, the good news is that there is still a lot of upside for the Stars Group given the opportunities that exist not only as a result of its recent acquisitions but also because sports betting looks to become legal across several U.S. states.”

It appears that management bit off a bit more than it could chew when it came to recent acquisitions. With a debt-to-equity ratio of 1.31, the company seems to be done with acquisitions for now (at least one would hope so!), leaving the next few years for a potential “spring cleaning” of recent messes as a result of the M&A, not only to get expenses back in order, but to get some meaningful synergies unlocked, as the international taboo on online gambling gradually fades away.

Now, a bet on Stars Group isn’t without its risks, but given the long-term growth potential, I think the risk/reward trade-off is tilted in the investor’s favour, especially when you consider the low bar, the stock’s absurdly cheap valuation, and the remarkable insider buying activities that have been going on in recent months.

Foolish takeaway on Stars Group

At the time of writing, the stock trades at a 7.2 forward P/E, a 1.1 P/B, and a 1.8 P/S, all of which are much lower than the company’s five-year historical average multiples of 217, 3.3, and 4.9, respectively.

You’re getting a robust portfolio of online gambling assets at near book. While upped expenses will likely continue burdening the stock over the medium term, any minor reduction in expenses, I believe, will be enough to send the stock much higher. Once the cash bleed halts, the healing can begin.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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