Whenever a company’s share price falls heavily, it can create a significant opportunity for new investors to buy in and benefit from sizeable long term gains. Of course, it can also be the start of a downward spiral, with the old adage that it is difficult to catch a falling knife being highly relevant.
With this in mind, do these two small-caps fall into the former or the latter bracket? Are Iofina (LSE: IOF) and Gulf Keystone Petroleum (LSE: GKP) (NASDAQOTH: GFKSY.US) worth buying, or should they be avoided at the present time?
Iofina
Iodine producer, Iofina, has seen its share price plummet by 7% today, after the company released a statement saying that it intends to delay publication of its final results until 25 May. The reason given for the delay is that the company needs more time to finalise the results, which appears to have spooked investors and could cause Iofina’s share price to come under further pressure between now and the release of the results.
Of course, Iofina’s most recent update showed that the company is making encouraging progress. For example, it said in mid-April that production had almost trebled in the first quarter of 2015 (versus the same quarter of the previous year), with March being a record month. Furthermore, it remained confident that the closure of one of its plants will not alter its production targets for the first half of the year.
However, Iofina also revealed in its most recent update that it took part in a hearing on February 19 with regards to an objection to its Montana water permit, with a ruling expected by June 6. This means that the end of May/start of June period looks set to be a crucial one for the business and, while it remains on-track to become a lower quartile cost iodine producer, it may be prudent to wait for the results and the outcome of the hearing before buying a slice of Iofina.
Gulf Keystone Petroleum
The major problem for investors in Gulf Keystone Petroleum is political risk, with this being a major factor in the company’s share price decline of 59% in the last year. And, while a low oil price is a challenge for the whole sector — and it looks set to remain at a relatively low ebb — realistically there is a decent chance that, over the medium to long term, the price of oil will increase beyond $60 per barrel.
However, the unrest in Iraq/Kurdistan may not be resolved in the short to medium term and, with Gulf Keystone having a balance sheet that is relatively highly leveraged, cash flow could become a problem in time. Certainly, the company is doing all of the right things and has a slick operation in Iraq/Kurdistan that is producing and selling oil — the problem, though, is receiving payment for it.
As such, and while Gulf Keystone could have a very bright future, now does not appear to be the perfect time to buy it. Moreover, with valuations in the oil sector being relatively low, there appear to be better opportunities elsewhere for capital gains over the medium to long term.
