When you’re invested (both literally and emotionally) in a stock, it can sometimes be hard to take a step back and objectively review the position you’re in. Sure, I believe everything I invest in should go up in value, but it doesn’t always happen.
It’s very important to monitor the positions you have when they’re loss-making and assess whether you should cut your losses or hold on to the shares with the thinking that future losses should be minimal. To that end, Sirius Minerals (LSE: SXX) has been heading lower over the past year. So when we look objectively at some numbers, what can we conclude about the future?
Sirius currently has a price-to-book (P/B) ratio of 0.26. What does this mean? Well it’s a ratio showing the premium or discount at which the company is trading in relation to the intrinsic value within the business. The book value measures what the firm is actually worth (in essence a net asset figure).
If the P/B ratio is 1, then the company’s shares trade at exactly what the business is physically worth. If the ratio was 2, this would show that investors view the company as worth double what the actual value of the business is, usually due to future potential for profit or general optimism about the business.
On the flip side, if the ratio was 0.5, then the share price value is half that of what the business is worth. How is this possible? Well investors may be pessimistic about the future of the company, or they may feel that the assets the business has are not actually that valuable. For Sirius, it has a low P/B ratio and a falling share price, showing that even though it looks cheap on paper in comparison to its book value, investors still don’t want to own it. For me this is worrying.
Anglo American offer price
In early January, we saw a rally in the share price due to news that Anglo American is potentially looking to table a bid. On Friday, the share price closed at 5.4p. The offer price being mooted is 5.5p. Here we have another number that worries me as a potential investor. If Anglo American had actually come up with a bid and invested at 5.5p, what potential is there for a strong share price rally if Sirius already trades close to the offer price?
Anglo American will still need to invest a large amount of money (I’ve seen articles quoting up to $3bn) in order to keep the project going over the next few years in order to try to generate profitability. Therefore, the 5.5p price seems fair value at the moment, and does so for the foreseeable future, until the investment kicks in and starts to yield results.
Overall, neither the P/B ratio nor the mooted offer price from Anglo American fill me with optimism that the Sirius share price is going to move higher any time soon. Yes, longer-term investors could see this as a value play, but for me I would look elsewhere for opportunities, with some good ones mentioned here.
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Jonathan Smith and 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.