Don’t Make These 3 Mistakes With Royal Dutch Shell Plc, Afren Plc And Globo Plc

Watch out for these potential pitfalls with Royal Dutch Shell Plc (LON:RDSB), Afren Plc (LON:AFR) and Globo plc (LON:GBO).

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Here are three important things to be aware of, if you’re looking at investing in blue-chip favourite Royal Dutch Shell (LSE: RDSB), heavy faller Afren (LSE: AFR) or popular small cap Globo (LSE: GBO).

Royal Dutch Shell

New investors typically look to familiar blue-chip names for their first purchases — such as oil giant Shell. If you’re in this position, don’t make the mistake that more than a few of your predecessors have made.

The Anglo-Dutch company is unusual in having two classes of share listed on London’s stock exchange: Class A (with the ticker RDSA) and Class B (with the ticker RDSB). The shares are identical, except when it comes to the dividend — and Shell’s current 6% dividend yield is certainly catching the eye of many investors. Basically (I won’t go into the technicalities), if you’re a UK resident, you’re liable to Dutch witholding tax on the dividend on the A shares, but not on the B shares.

It generally makes sense, then, for a UK resident to buy the B shares. So, be careful when putting in your buy order. Even experienced investors have been known to inadvertently buy the A shares due to a slip of the finger!

Afren

It’s an old stock market adage that just because a share halves in price doesn’t mean it can’t halve again. Anyone who bought oil producer Afren last autumn after it’s shares had fallen 50% from their early 2014 high of 165p will have seen the shares halve again … and again … and again … and again. The price is 3.2p, as I write.

When a share price falls, it doesn’t necessarily mean that the company has got “cheaper”. The intrinsic value of the business may have fallen, making a lower share price thoroughly justified. This is what’s happened with Afren; and a perfect storm of a collapsing oil price, large debts and a cash flow crunch have brought the company to its knees.

What’s more, even at 3.2p, Afren’s shares could — I almost wrote “will” — halve again. This is because Afren’s situation has become so precarious that in order to save the business the board of directors is proposing a desperate financial restructuring in which billions of new shares will be issued to the company’s lenders (bondholders) “at nominal value” of less than 1p. The shares are currently being propped up at 3.2p by naive investors and long-shot gamblers hoping for some alternative solution — a.k.a. a miracle of Biblical dimensions — to preserve the value of the existing equity.

Globo

AIM-listed technology firm Globo — whose shares are currently trading at 55p — has caught the eye of many a private investor. The company has delivered just under 40% a year average earnings growth over the last four years.

If you look at the list of “broker views” found on many financial websites, you’ll find reasonably recent “buy”/”outperform” recommendations for Globo from two brokers: Canaccord Genuity, which has a target price of 90p, and RBC Capital Markets, with a target price of 120p. However, these firms happen to be Globo’s house brokers. House brokers have a tendency to share the rosy views of the companies that employ them, so caution needs to be exercised.

And, indeed, there’s a more sceptical view of Globo. Why, you might ask, is a growth company like this trading on a lowly single-digit P/E? Well, hard cash flow is a mere trickle compared with the impressive paper profits of the company’s income statement. On a cash flow basis, Globo hardly merits its current market valuation of a bit over £200m, far less the £336m-£448m implied by the house brokers’ price targets.

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 assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Afren. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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