Petra Diamonds (LSE: PDL) is a London-quoted share which really has the bit between its teeth as we rapidly approach the new year. The precious stones producer has lost more than three-quarters of its value so far since January, sure, though a near-20% spike over the past month suggests that a healthy recovery could be around the corner.
I’m not convinced, however. Not by a long chalk. Investor sentiment has improved in part on news in mid-November that Petra had sold a rare 20.08 carat blue diamond recovered from its Cullinan mine in South Africa. It was offloaded for a cool $14.9m, in line with expectations, and gave a boost to the company’s debt-laden balance sheet (as of September the FTSE 250 firm had a whopping $592.8m worth of net debt on the books, up from $564.8m just three months earlier).
But don’t get too excited by the company’s recent sales success, I say. The cooling global economy continues to play havoc with diamond prices, as a recent de Beers auction in November showed (according to Bloomberg, diamonds there went under the gavel for 5% less than they did a year earlier).
The consequence of lower stone prices and falling volumes caused revenues at Petra to tank 23% in the three months to September, to $61.6m, and a 4% drop in prices of its diamonds in the quarter show that the market remains some way off recovery.
City analysts, unsurprisingly, expect Petra to remain loss-making in the current year (to June 2020). And it’s difficult to see just how the business will flip back into profit any time soon as the geopolitical and macroeconomic stresses smacking the global economy steadily worsen.
I continue to believe that this particular raw materials giant should be given an extremely wide berth, particularly given the eye-popping scale of its debt levels.
A better FTSE 100 buy!
I believe that share pickers would be much better off using any investment cash to buy shares in Associated British Foods (LSE: ABF) instead. The FTSE 100 operator’s share price has risen 15% over the last month, meaning that its has ballooned by almost a quarter in value since the start of 2019.
The Primark owner has flown on the back of some scintillating full-year results released at the start of November. Back then it declared that revenues and adjusted pre-tax profits had both risen 2% in the financial year ending September 2019, to £15.8b and £1.41b respectively, a result driven by particular strength at its grocery unit and its discount retail division.
And there’s clearly plenty of reason to be excited in the current fiscal year as Primark’s expansion plan clicks through the gears, and as tough economic conditions across mainland Europe and the UK boost the popularity of its cut-price clothing lines.
In fact, City analysts expect earnings growth at ABF to accelerate to 8% in fiscal 2020, leaving it trading on a forward P/E ratio of 17.1 times. I consider this to be brilliant value considering the soaring popularity of Primark all over the globe and one which makes the business a brilliant buy for 2020 and beyond.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.