Are 88 Energy Ltd, Highland Gold Mining Ltd and Plexus Holdings plc too risky to buy?

Should you avoid these 3 resource-focused stocks? 88 Energy Ltd (LON: 88E), Highland Gold Mining Ltd (LON: HGM) and Plexus Holdings plc (LON: POS).

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Shares in oil and gas support services company Plexus (LSE: POS) have endured a torrid 2016, falling in value by 56% since the turn of the year. The main reason for this is a tough operating environment, with the reduction in spending and investment across the industry causing investor sentiment in Plexus to deteriorate.

Looking ahead, the price of oil seems likely to remain relatively low in the short-to-medium term. Certainly, there’s potential for it to rise in the long run as demand from emerging economies increases and supply stabilises. However, in the short run things could get worse before they get better for Plexus and its share price could come under a degree of pressure.

With Plexus forecast to post losses in both the current year and next year, its outlook is rather downbeat. And with there being a number of other oil and gas companies that are profitable and offering good value for money, there appear to be better options available elsewhere.

Gold standard

While Plexus’s share price has been falling this year, shares in Highland Gold (LSE: HGM) have soared by around 60%. A key reason for this is the rising price of gold, with a changing stance from the US Federal Reserve being a key reason for this.

While the Fed had previously been expected to raise US interest rates up to four times this year, it’s now expected to do so just once or maybe twice. This means that non-interest-producing assets such as gold should hold greater appeal and as such, its price has strengthened.

Clearly, Highland Gold’s share price is highly dependent on the price of gold and with uncertainty surrounding the global economy being high, it would be of little surprise for the precious metal to continue to rise. Therefore, against this backdrop and with Highland Gold expected to increase its earnings by 47% next year and its shares trading on a price-to-earnings-growth (PEG) ratio of only 0.1, it seems to offer a very enticing risk/reward ratio.

Risky but rewarding

Meanwhile, shares in 88 Energy (LSE: 88E) have soared in 2016. They’ve risen by 348% year-to-date after the company reported a major discovery in Alaska, with that boosting investor sentiment in the stock due to the potential for significant production in future. And with news flow since then being positive in terms of 88 Energy announcing an increase to the independent resource estimate at the Icewine project, it’s little wonder its shares have been in demand – as evidenced by the oversubscribed share placing a few weeks ago.

While the potential rewards of investing in 88 Energy are considerable, it remains a relatively risky stock. Certainly, it has had positive news flow in recent months but this can change quickly and with 88 Energy likely to require further fundraising, it may only be of interest to less risk-averse investors.

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.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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