Today I am looking at three stocks which should give investors plenty of nightmares.
Shares in fossil fuel goliath BP (LSE: BP) (NYSE: BP.US) have begun to head lower in recent days after a bumper start to the year. And with good reason: although the number of US shale rigs across the country continues to steadily fall, total production keeps on rising as output at the country’s most productive fields gushes forth.
Combined with industry cartel OPEC’s reluctance to cut its own output, and a stuttering global economy failing to boost demand, black gold inventories are likely to keep on swelling. As a result oil prices, which have collapsed by almost half since last summer to around $60 per barrel, are in danger of another slide lower.
And I would argue that BP’s share price does not reflect these fears at the current time. The business is expected to record earnings growth of 73% and 46% in 2015 and 2016 correspondingly, leaving the firm changing hands on a huge P/E multiple of 19 times prospective earnings for this year, although this collapses to 13.7 times for next year.
I believe that a reading closer to the bargain benchmark of 10 times would be a fairer reflection of the structural problems facing BP and its big-cap peers. With the business also taking the hatchet to its exploration budget to conserve cash, and vowing to sell billions of dollars worth of assets, it is difficult to see how the firm will punch any sort of meaningful earnings recovery in the near term or beyond.
Telematics specialist Quindell (LSE: QPP) has been the subject of a heavy battering for close to a year now — indeed, the business has shed almost nine-tenths of its value since the mysterious Gotham City Research cast doubts over the company’s accounts and branded the business “uninvestable” in April.
Although Quindell won a libel action against the researcher in September, concerns over the firm’s internal processes were stoked again late last year after PwC was called in to investigate the state of the firm’s finances. The accountancy was expected to report late last month, but due to the “high level of corporate activity” at Quindell PwC is still to release its findings.
This hardly does investor confidence in the firm’s behind-the-scenes conduct any favours given that chief executive and founder Rob Terry, as well as several other board members, were forced to vacate last year after being embroiled in a complex share-dealing scheme.
On top of this, Quindell’s ability to turn revenues into cash is also playing havoc with shareholders’ nerves, exacerbated by the company’s potential firesale of prized assets. Quindell confirmed in February that it remains in talks to sell its legal services arm to Slater & Gordon, a division responsible for half of all revenues, while a spate of non-core assets are also up for sale.
In my opinion there is too much uncertainty swirling around Quindell to make it an appealing stock selection, and believe that PwC’s much-awaited report — which is expected any time now — could deliver yet more nightmares for shareholders.
Like BP, I believe that Glencore (LSE: GLEN) is in danger of succumbing to worsening supply/demand fundamentals in critical commodity markets. The business saw adjusted EBIDTA slide 2% last year, to $12.8bn, as price weakness across the metals, energy and agricultural sectors hampered revenues.
The business said that production ramp-ups across key markets helped to mitigate the effect of depressed prices, and is in the process of aggressively expanding its copper, zinc and nickel output operations. But such actions are likely to weigh further on the top-line as slowing global demand, particularly from the manufacturing hotbed of China, maintains bulky market supplies.
The City expects the digger to record earnings growth of 42% in 2015 and 49% in 2016, pushing its P/E multiple from 15.6 times this year to just 9.7 times for 2016.
Even though the fruits of Glencore’s ongoing restructuring drive should help to improve the firm’s earnings performance in coming years, the prospect of prolonged revenues troubles threatens to derail any solid earnings recovery in my opinion, making the raw materials giant an extremely risky pick.
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Royston Wild 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.