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1 stock I’d avoid along with Provident Financial plc, up 70% today

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Mexico-focused silver, gold and other base metals mining company Fresnillo (LSE: FRES) released robust-looking full-year results today showing adjusted revenue just over 9% higher than in 2016 and adjusted earnings per share from continuing operations up 44%.

The company explained that the revenue increase is due to “record silver volumes, an increase in zinc volumes sold and higher base metal prices.”  The firm is one of the largest producers of silver in the world, and there’s a buzz about silver because it has industrial uses, and demand looks set to increase with today’s emerging technology. For example, silver goes into components for photovoltaic cells, which are the foundation of the solar energy sector, and there are increasing uses for silver in medicine because of its antibacterial qualities. More than 50% of the annual demand for silver worldwide over recent years has been from industry and that figure is rising.

All in the price?

Many believe that the price of silver will head up over time because of increasing industrial demand, which would be good for the profits of silver producers such as Fresnillo. However, in the outlook statement of today’s report, the directors warn that they expect 2018 to be challenging: Inflationary pressures are likely to increase and it is unclear whether precious metals prices have already bottomed out or may drift lower.”

That’s my big worry with this firm. The story about increasing industrial demand for silver is well known and past speculation could mean that future increases in demand are already accommodated in the price of the metal. Not only that, but Fresnillo’s valuation looks like higher production and profits are already baked into the share price. At today’s 1,292p, the stock throws up a forward price-to-earnings ratio just under 22. That’s high for a cyclical miner and the valuation could drag on share price progress. There’s also a lot of other downside risks for the stock. If the price of silver falls, or if costs get out of control as they did in the mining sector 10 years ago, we could see a plunge in the share price.

Payday for shareholders

Meanwhile, it’s payday for shareholders of troubled doorstep lender Provident Financial (LSE: PFG). The share price is up just over 70% today after the firm issued its full-year results report and announced a 17 for 24 fully underwritten Rights Issue and settlement of the Financial Conduct Authority’s (FCA) investigation into the firm’s Vanquis Bank and its Repayment Option Plan (ROP).

News of the Rights Issue leaked out over the past weekend sending the shares into a plunge below 600p. However, the important news today is that the FCA investigation into Vanquis Bank has been settled and Provident Financial is setting aside just over £172m as the estimated cost of the settlement — the market hates uncertainty and now the damage has been quantified.

Turnaround investors here are now back on track and can even pick up discounted Rights Issue Shares for just 315p. But I would not be keen to participate in the story as a new investor today, after such a big rise. Let’s not forget that Provident Financial recently demonstrated the fragility of its business model and although it’s cheap, I think there could be further risks ahead.

What these investors will not do again

I'm not keen on Fresnillo or Provident Financial, as you can see. But buying shares in firms with significant downside risk in their business models is just one way of messing up on the stock market. The Motley Fool asked several experienced investors to confess their worst investing mistakes ever and they revealed all in a report called The Worst Mistakes Investors Make. Reading the report is a sobering experience, which I recommend you undertake right now, by clicking here.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.