Why I won’t be buying these two stock rockets

Royston Wild discusses two stocks with dicey profits pictures.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Perky production news from Premier Oil (LSE: PMO) has helped to power the driller’s share value to six-week highs this week.

On Wednesday, Premier announced that, at its Zama-1 exploration well in Block 7 off the coast of Mexico, it had made what it described “a world class oil discovery.” The news saw the stock leap 36% on the day, pulling it to its highest level since late May.

The London driller — which owns a 25% stake in the asset — said that Zama-1 could hold more than 1bn barrels of the black stuff. It has described the well as “a commercial standalone development which adds materially to Premier’s portfolio of assets worldwide.”

In other news…

Premier’s share price remained stable on Thursday following the release of latest financials, the company advising that first-half production of 82,100 barrels of oil equivalent per day beat guidance and was up 34.5% from the corresponding 2016 period.

While the company kept its full-year production target unchanged at 75,000 barrels per day, it advised that this “will be reviewed on completion of the summer maintenance period.”

This was not the only good news at Premier. Operating costs fell 11% during January-June, to $14.70 per barrel, it advised, while the firm’s full-year capital expenditure target was reduced to $325m from $350m previously.

Furthermore, positive cash flow in the period helped net debt fall to $2.7bn as of June, down from $2.8bn at the close of 2017.

Risks exceed possible rewards

While recent newsflow from Premier has undoubtedly been pretty terrific, I would not be surprised to see its share price shuttle lower once again.

Prior to this week’s releases the driller’s share price had been sinking in 2017 as the steady ramp-up in US production, allied with rising scepticism over the impact of OPEC’s supply-cutting drive, has put Brent values on the back foot. Indeed, Premier is still trading at a 35% discount to January’s highs of 96p per share.

The City expects the fossil fuel giant to finally flip into the black with profits of around £42m in 2017. But as the risks to Premier’s long-term profitability continue to mount, I for one will be remaining on the sidelines.

Supply fears

Diversified mining colossus Rio Tinto (LSE: RIO) is another commodities play I continue to steer well clear of.

Like Premier Oil, the iron ore giant has enjoyed decent share price momentum in recent times, the stock gaining 15% in a little over three weeks. Rio Tinto has leapt as prices of the steelmaking ingredient have ticked higher again — ore values boomed above $65 per tonne just this week, the highest since early May.

But although Chinese demand remains stable, I believe the vast tonnages of low-cost supply entering the market from Australasia and South America could prompt a calamitous retracement in the iron ore price. And my concerns are evident in broker forecasts, with expectations of a 57% earnings rise at Rio in 2017 to be followed by a 22% reversal next year.

A very-low earnings multiple of 10 times is not enough to convince me to invest, I’m afraid.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »